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Testimony:

Before the Committee on Commerce, Science, and Transportation, U.S. 
Senate:

United States Government Accountability Office:

GAO:

For Release on Delivery Expected at 2:00 p.m. EDT:

Monday, April 11, 2005:

Telecommunications:

Application of the Antideficiency Act and Other Fiscal Controls to 
FCC's E-Rate Program:

Statement of Patricia A. Dalton, Managing Director, Physical 
Infrastructure Issues:

GAO-05-546T:

GAO Highlights:

Highlights of GAO-05-546T, a testimony before the Committee on 
Commerce, Science, and Transportation, U.S. Senate:

Why GAO Did This Study:

Since 1998, the Federal Communications Commission's (FCC) E-rate 
program has committed more than $13 billion to help schools and 
libraries acquire Internet and telecommunications services. As steward 
of the program, FCC must ensure that participants use E-rate funds 
appropriately and that there is managerial and financial accountability 
surrounding the funds. This testimony is based on GAO's February 2005 
report GAO-05-151, which reviewed (1) the effect of the current 
structure of the E-rate program on FCC's management of the program, 
including the applicability of the Antideficiency Act, (2) FCC's 
development and use of E-rate performance goals and measures, and (3) 
the effectiveness of FCC's program oversight mechanisms.

What GAO Found:

FCC established E-rate as a multibillion-dollar program operating under 
an organizational structure unusual to the federal government, but 
never conducted a comprehensive assessment to determine which federal 
requirements, policies, and practices apply to the program, to the 
Universal Service Administrative Company, and to the Universal Service 
Fund itself. FCC has addressed these issues on a case-by-case basis, 
but this has put FCC and the E-rate program in the position of reacting 
to problems as they occur rather than setting up an organization and 
internal controls designed to ensure compliance with applicable laws.

With regard to the Antideficiency Act, we agree with FCC's conclusions 
that the Universal Service Fund is a permanent indefinite 
appropriation, is subject to that act, and that the issuance of E-rate 
funding commitment letters constitutes obligations for purposes of the 
act. We believe that Congress should consider either granting the 
Universal Service Fund a two-or three-year exemption from the 
Antideficiency Act or crafting a limited exemption that would provide 
management flexibility. For example, Congress could specify that FCC 
could use certain receivables or assets as budgetary resources. These 
more limited solutions would allow time for the National Academy of 
Public Administration to complete its study of the Universal Service 
Fund program and report its findings to FCC. Congress and FCC could 
then comprehensively assess, based on decisions concerning the 
structure of the program, which federal requirements, policies, and 
practices should apply to the fund and to any entities administering 
the program. It could then be determined whether a permanent and 
complete exemption from the Antideficiency Act is warranted.

FCC has not developed useful performance goals and measures for 
assessing and managing the E-rate program. The goals established for 
fiscal years 2000 through 2002 focused on the percentage of public 
schools connected to the Internet, but the data used to measure 
performance did not isolate the impact of E-rate funding from other 
sources of funding, such as state and local government. In its 2003 
assessment of the program, OMB concluded that there was no way to tell 
whether the program has resulted in the cost-effective deployment and 
use of advanced telecommunications services. In response, FCC is 
working with OMB on developing new E-rate measures.

According to FCC officials, oversight of the program is primarily 
handled through agency rulemaking procedures, beneficiary audits, and 
appeals decisions. FCC's rulemakings, however, have often lacked 
specificity, which has affected the recovery of funds for program 
violations. FCC has also been slow to respond to beneficiary audit 
findings and make full use of them to strengthen the program. In 
addition, the small number of these audits completed to date do not 
provide a basis for accurately assessing the level of fraud, waste, and 
abuse occurring in the program. According to FCC officials, there is 
also a substantial backlog of E-rate appeals.

What GAO Recommends:

In its report, GAO recommends that FCC (1) comprehensively determine 
which federal accountability requirements apply to E-rate; (2) 
establish meaningful E-rate performance goals and measures; and (3) 
take steps to reduce its backlog of appeals. In response, FCC stated 
that it does not concur with (1) because it maintains it has done this 
on a case-by-case basis. GAO continues to believe that major issues 
remain unresolved. FCC concurs with (2) and (3), noting that it is 
already taking steps on these issues.

www.gao.gov/cgi-bin/getrpt?GAO-05-546T.

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact Patricia A. Dalton at 
(202) 512-2834 or daltonp@gao.gov.

[End of section]

Mr. Chairman, Mr. Co-Chairman, and Members of the Committee:

We are pleased to be here to discuss the results of our recently 
completed review of the Federal Communications Commission's (FCC) 
universal service program for schools and libraries and to discuss 
specifically the applicability of the Antideficiency Act to the 
program. As you know, the Telecommunications Act of 1996 expanded the 
concept of universal service to include assistance to schools and 
libraries in acquiring telecommunications and Internet services; the 
act charged FCC with establishing the universal service discount 
mechanism for eligible schools and libraries. The commission, in turn, 
created a large and ambitious program that became commonly known as the 
"E-rate" program, and set the annual funding cap for the program at 
$2.25 billion. FCC designated the Universal Service Administrative 
Company (USAC), a private, not-for-profit corporation established under 
FCC's rules, to carry out the day-to-day operations of the E-rate 
program. FCC retains responsibility for overseeing the program's 
operations and ensuring compliance with the commission's rules.

Since 1998, the E-rate program has committed more than $13 billion in 
funding to help schools and libraries across the nation acquire 
telecommunications and Internet services. Eligible schools and 
libraries can apply annually to receive support, which can be used for 
specific eligible services and equipment such as telephone services, 
Internet access services, and the installation of internal wiring and 
other related items. Recently, however, allegations have been made that 
some E-rate beneficiaries (schools and libraries) and service providers 
(e.g., telecommunications and network equipment companies) have 
fraudulently obtained, wasted, or abused E-rate funding. In May 2004, 
for example, one service provider involved in E-rate projects in 
several states pleaded guilty to bid rigging and wire fraud and agreed 
to pay more than $20 million in criminal fines, civil payments, and 
restitution.

In February 2005, we issued a report on various aspects of the program. 
Specifically, we evaluated (1) the effect of the current structure of 
the E-rate program on FCC's management of the program, (2) FCC's 
development and use of performance goals and measures in managing the 
program, and (3) the effectiveness of FCC's oversight mechanisms-- 
rulemaking proceedings, beneficiary audits, and reviews of USAC 
decisions (appeals)--in managing the program.

Our testimony today is based on this report, which contains a fuller 
discussion of the results of our review and recommendations for 
improving FCC's management and oversight of the E-rate 
program.[Footnote 1] In summary, we found the following:

* FCC established E-rate as a multibillion-dollar program operating 
under an organizational structure unusual to the federal government, 
but never conducted a comprehensive assessment to determine which 
federal requirements, policies, and practices apply to the program, to 
the Universal Service Administrative Company, and to the Universal 
Service Fund itself. FCC has addressed these issues on a case-by-case 
basis, but this has put FCC and the E-rate program in the position of 
reacting to problems as they occur rather than setting up an 
organization and internal controls designed to ensure compliance with 
applicable laws.

* With regard to the Antideficiency Act, we agree with FCC's 
conclusions that the Universal Service Fund is a permanent indefinite 
appropriation, is subject to that act, and that the issuance of E-rate 
funding commitment letters constitutes obligations for purposes of the 
act. We believe that Congress should consider either granting the 
Universal Service Fund a two-or three-year exemption from the 
Antideficiency Act or crafting a limited exemption that would provide 
management flexibility. For example, Congress could specify that FCC 
could use certain receivables or assets as budgetary resources. These 
more limited solutions would allow time for the National Academy of 
Public Administration to complete its study of the Universal Service 
Fund program and report its findings to FCC. Congress and FCC could 
then comprehensively assess, based on decisions concerning the 
structure of the program, which federal requirements, policies, and 
practices should apply to the fund and to any entities administering 
the program. It could then be determined whether a permanent and 
complete exemption from the Antideficiency Act is warranted.

* FCC has not developed meaningful performance goals and measures for 
assessing and managing the program. As a result, there is no way to 
tell whether the program has resulted in the cost-effective deployment 
and use of advanced telecommunications services for schools and 
libraries.

* FCC's program oversight mechanisms contain weaknesses that limit 
FCC's management of the program and its ability to understand the scope 
of waste, fraud, and abuse within the program. For example, FCC's 
rulemakings have often lacked specificity and have led to situations 
where important USAC administrative procedures have been deemed 
unenforceable by FCC. There is also a significant backlog of E-rate 
appeals that adds uncertainty to the program and impacts beneficiaries.

FCC has taken some important steps, particularly in recent months, to 
address some of the areas of concern discussed in our report. 
Nevertheless, we believe that FCC has not done enough to proactively 
manage and provide a framework of government accountability for the 
multibillion-dollar E-rate program. To address the management and 
oversight problems we have identified, we recommended in our report 
that the Chairman of FCC: (1) conduct and document a comprehensive 
assessment to determine whether all necessary government accountability 
requirements, policies, and practices have been applied and are fully 
in place to protect the E-rate program and universal service funding; 
(2) establish meaningful performance goals and measures for the E-rate 
program; and (3) develop a strategy for reducing the E-rate program's 
appeals backlog, including that adequate staffing resources are devoted 
to E-rate appeals.

Background:

The concept of "universal service" has traditionally meant providing 
residential telephone subscribers with nationwide access to basic 
telephone services at reasonable rates. The Telecommunications Act of 
1996 broadened the scope of universal service to include, among other 
things, support for schools and libraries. The act instructed the 
commission to establish a universal service support mechanism to ensure 
that eligible schools and libraries have affordable access to and use 
of certain telecommunications services for educational 
purposes.[Footnote 2] In addition, Congress authorized FCC to 
"establish competitively neutral rules to enhance, to the extent 
technically feasible and economically reasonable, access to advanced 
telecommunications and information services for all public and 
nonprofit elementary and secondary school classrooms . . . and 
libraries. . . ."[Footnote 3] Based on this direction, and following 
the recommendations of a Federal-State Joint Board on Universal 
Service,[Footnote 4] FCC established the schools and libraries 
universal service mechanism that is commonly referred to as the E-rate 
program. The program is funded through statutorily mandated payments by 
companies that provide interstate telecommunications services.[Footnote 
5] Many of these companies, in turn, pass their contribution costs on 
to their subscribers through a line item on subscribers' phone 
bills.[Footnote 6] FCC capped funding for the E-rate program at $2.25 
billion per year, although funding requests by schools and libraries 
can greatly exceed the cap. For example, schools and libraries 
requested more than $4.2 billion in E-rate funding for the 2004 funding 
year.

In 1998, FCC appointed USAC as the program's permanent administrator, 
although FCC retains responsibility for overseeing the program's 
operations and ensuring compliance with the commission's 
rules.[Footnote 7] In response to congressional conference committee 
direction,[Footnote 8] FCC has specified that USAC "may not make 
policy, interpret unclear provisions of the statute or rules, or 
interpret the intent of Congress."[Footnote 9] USAC is responsible for 
carrying out the program's day-to-day operations, such as maintaining a 
Web site that contains program information and application procedures; 
answering inquiries from schools and libraries; processing and 
reviewing applications; making funding commitment decisions and issuing 
funding commitment letters; and collecting, managing, investing, and 
disbursing E-rate funds. FCC permits--and in fact relies on--USAC to 
establish administrative procedures that program participants are 
required to follow as they work through the application and funding 
process.

Under the E-rate program, eligible schools, libraries, and consortia 
that include eligible schools and libraries[Footnote 10] may receive 
discounts for eligible services. Eligible schools and libraries may 
apply annually to receive E-rate support. The program places schools 
and libraries into various discount categories, based on indicators of 
need, so that the school or library pays a percentage of the cost for 
the service and the E-rate program funds the remainder. E-rate 
discounts range from 20 percent to 90 percent. USAC reviews all of the 
applications and related forms and issues funding commitment decision 
letters. Generally, it is the service provider that seeks reimbursement 
from USAC for the discounted portion of the service rather than the 
school or library.[Footnote 11]

FCC Established an Unusual Program Structure without Comprehensively 
Addressing the Applicability of Governmental Standards and Fiscal 
Controls:

FCC established an unusual structure for the E-rate program but has 
never conducted a comprehensive assessment of which federal 
requirements, policies, and practices apply to the program, to USAC, or 
to the Universal Service Fund itself. FCC only recently began to 
address a few of these issues.

The Telecommunications Act of 1996 neither specified how FCC was to 
administer universal service to schools and libraries nor prescribed 
the structure and legal parameters of the universal service mechanisms 
to be created. The Telecommunications Act required FCC to consider the 
recommendations of the Federal-State Joint Board on Universal Service 
and then to develop specific, predictable, and equitable support 
mechanisms. Using the broad language of the act, FCC crafted an 
ambitious program for schools and libraries--roughly analogous to a 
grant program--and gave the program a $2.25 billion annual funding cap. 
To carry out the day-to-day activities of the E-rate program, FCC 
relied on a structure it had used for other universal service programs 
in the past--a not-for-profit corporation established at FCC's 
direction that would operate under FCC oversight. However, the 
structure of the E-rate program is unusual in several respects compared 
with other federal programs:

* FCC appointed USAC as the permanent administrator of the Universal 
Service Fund,[Footnote 12] and FCC's Chairman has final approval over 
USAC's Board of Directors. USAC is responsible for administering the 
program under FCC orders, rules, and directives. However, USAC is not 
part of FCC or any other government entity; it is not a government 
corporation established by Congress; and no contract or memorandum of 
understanding exists between FCC and USAC for the administration of the 
E-rate program. Thus, USAC operates and disburses funds under less 
explicit federal ties than many other federal programs.

* Questions as to whether the monies in the Universal Service Fund 
should be treated as federal funds have troubled the program from the 
start. Even though the fund has been listed in the budget of the United 
States and, since fiscal year 2004, has been subject to an annual 
apportionment from OMB, the monies are maintained outside of Treasury 
accounts by USAC and some of the monies have been invested.[Footnote 
13] The United States Treasury implements the statutory controls and 
restrictions involving the proper collection and deposit of 
appropriated funds, including the financial accounting and reporting of 
all receipts and disbursements, the security of appropriated funds, and 
agencies' responsibilities for those funds.[Footnote 14]

As explained below, appropriated funds are subject, unless specifically 
exempted by law, to a variety of statutory controls and restrictions. 
These controls and restrictions, among other things, limit the purposes 
for which federal funds can be used and provide a scheme of 
accountability for federal monies. Key requirements are in Title 31 of 
the United States Code and the appropriate Treasury regulations, 
[Footnote 15] which govern fiscal activities relating to the 
management, collection, and distribution of public money.

Since the inception of the E-rate program, FCC has struggled with 
identifying the nature of the Universal Service Fund and the 
managerial, fiscal, and accountability requirements that apply to the 
fund. FCC's Office of Inspector General first looked at the Universal 
Service Fund in 1999 as part of its audit of the commission's fiscal 
year 1999 financial statement because FCC had determined that the 
Universal Service Fund was a component of FCC for financial reporting 
purposes. During that audit, the FCC IG questioned commission staff 
regarding the nature of the fund and, specifically, whether it was 
subject to the statutory and regulatory requirements for federal funds. 
In the next year's audit, the FCC IG noted that the commission could 
not ensure that Universal Service Fund activities were in compliance 
with all laws and regulations because the issue of which laws and 
regulations were applicable to the fund was still unresolved at the end 
of the audit.

FCC officials told us that the commission has substantially resolved 
the IG's concerns through recent orders, including FCC's 2003 order 
that USAC begin preparing Universal Service Fund financial statements 
consistent with generally accepted accounting principles for federal 
agencies (GovGAAP) and keep the fund in accordance with the United 
States Government Standard General Ledger. While it is true that these 
steps and other FCC determinations discussed below should provide 
greater protections for universal service funding, FCC has addressed 
only a few of the issues that need to be resolved. In fact, staff from 
the FCC's IG's office told us that they do not believe the commission's 
GovGAAP order adequately addressed their concerns because the order did 
not comprehensively detail which fiscal requirements apply to the 
Universal Service Fund and which do not.

FCC's Decision on the Antideficiency Act Should Be Addressed in a 
Broader Context:

FCC has made some determinations concerning the status of the Universal 
Service Fund and the fiscal controls that apply. For example, FCC has 
concluded that the Universal Service Fund is a permanent indefinite 
appropriation subject to the Antideficiency Act and that its issuance 
of funding commitment letters constitutes recordable obligations for 
purposes of the act. We agree with FCC's determinations on these 
issues, as explained in detail in appendix I. However, FCC's 
conclusions concerning the status of the Universal Service Fund raise 
further issues relating to the collection, deposit, obligation, and 
disbursement of those funds--issues that FCC needs to explore and 
resolve comprehensively rather than in an ad hoc fashion as problems 
arise.

Status of funds as appropriated funds. In assessing the financial 
statement reporting requirements for FCC components in 2000, FCC 
concluded that the Universal Service Fund constitutes a permanent 
indefinite appropriation (i.e., funding appropriated or authorized by 
law to be collected and available for specified purposes without 
further congressional action). We agree with FCC's conclusion. 
Typically, Congress will use language of appropriation, such as that 
found in annual appropriations acts, to identify a fund or account as 
an appropriation and to authorize an agency to enter into obligations 
and make disbursements out of available funds. Congress, however, 
appropriates funds in a variety of ways other than in regular 
appropriations acts. Thus, a statute that contains a specific direction 
to pay and a designation of funds to be used constitutes an 
appropriation.[Footnote 16] In these statutes, Congress (1) authorizes 
the collection of fees and their deposit into a particular fund, and 
(2) makes the fund available for expenditure for a specified purpose 
without further action by Congress. This authority to obligate or 
expend collections without further congressional action constitutes a 
continuing appropriation or a permanent appropriation of the 
collections.[Footnote 17] Because the Universal Service Fund's current 
authority stems from a statutorily authorized collection of fees from 
telecommunications carriers and the expenditure of those fees for a 
specified purpose (that is, the various types of universal service), it 
meets both elements of the definition of a permanent appropriation.

Decision regarding the Antideficiency Act. As noted above, in October 
2003, FCC ordered USAC to prepare financial statements for the 
Universal Service Fund, as a component of FCC, consistent with GovGAAP, 
which FCC and USAC had not previously applied to the fund. In February 
2004, staff from USAC realized during contractor-provided training on 
GovGAAP procedures that the commitment letters sent to beneficiaries 
(notifying them whether or not their funding is approved and in what 
amount) might be viewed as "obligations" of appropriated 
funds.[Footnote 18] If so, and if FCC also found the Antideficiency 
Act--which does not allow an agency or program to make obligations in 
excess of available budgetary resources--to be applicable to the E-rate 
program, then USAC would need to dramatically increase the program's 
cash-on-hand and lessen the program's investments[Footnote 19] to 
provide budgetary authority sufficient to satisfy the Antideficiency 
Act. As a result, USAC suspended funding commitments in August 2004 
while waiting for a commission decision on how to proceed. At the end 
of September 2004--facing the end of the fiscal year--FCC decided that 
commitment letters were obligations, that the Antideficiency Act did 
apply to the program, and that USAC would need to immediately liquidate 
some of its investments to come into compliance with the Antideficiency 
Act. According to USAC officials, the liquidations cost the fund 
approximately $4.6 million in immediate losses and could potentially 
result in millions in foregone annual interest income.

FCC was slow to recognize and address the issue of the applicability of 
the Antideficiency Act, resulting in the abrupt decision to suspend 
funding commitment decision letters and liquidate investments. In 
response to these events, in December 2004, Congress passed a bill 
granting the Universal Service Fund a one-year exemption from the 
Antideficiency Act.[Footnote 20] Nevertheless, FCC's conclusion on this 
issue was correct: Absent a statutory exemption, the Universal Service 
Fund is subject to the Antideficiency Act, and its funding commitment 
decision letters constitute obligations for purposes of the act.

The Antideficiency Act applies to "official[s] or employee[s] of the 
United States Government . . . mak[ing] or authorizing an expenditure 
or obligation . . . from an appropriation or fund." 31 U.S.C.  
1341(a). As discussed above, the Universal Service Fund is an 
"appropriation or fund." Even though USAC--a private entity whose 
employees are not federal officers or employees--is the administrator 
of the program and the entity that obligates and disburses money from 
the fund, application of the act is not negated. This is because, as 
recognized by FCC, it, and not USAC, is the entity that is legally 
responsible for the management and oversight of the E-rate program and 
because FCC's employees are federal officers and employees of the 
United States subject to the Antideficiency Act. Thus, the Universal 
Service Fund will again be subject to the Antideficiency Act when the 
one-year statutory exemption expires, unless action is taken to extend 
or make permanent the exemption.

An important issue that arises from the application of the 
Antideficiency Act to the Universal Service Fund is what actions 
constitute obligations chargeable against the fund. Under the 
Antideficiency Act, an agency may not incur an obligation in excess of 
the amount available to it in an appropriation or fund. Thus, proper 
recording of obligations with respect to the timing and amount of such 
obligations permits compliance with the Antideficiency Act by ensuring 
that agencies have adequate budget authority to cover all of their 
obligations. Our decisions have defined an "obligation" as a commitment 
creating a legal liability of the government, including a "legal duty . 
. . which could mature into a liability by virtue of actions on the 
part of the other party beyond the control of the United States. . . 
."[Footnote 21]

With respect to the Universal Service Fund, the funding commitment 
decision letter provides the school or library with the authority to 
obtain services from a provider with the commitment that the school or 
library will receive a discount and the service provider will be paid 
for the discounted portion with E-rate funding. Although the school or 
library could decide not to seek the services or the discount, so long 
as the funding commitment decision letter remains valid and 
outstanding, USAC and FCC no longer control the Universal Service 
Fund's liability; it is dependent on the actions taken by the school or 
library. Consequently, we agree with FCC that a recordable obligation 
is incurred at the time of issuance of the funding commitment decision 
letter indicating approval of the applicant's discount.

Additional issues that remain to be resolved by FCC include whether 
other actions taken in the Universal Service Fund program constitute 
obligations and the timing and amounts of obligations that must be 
recorded. For example, this includes the projections and data 
submissions by USAC to FCC and by participants in the High Cost and Low 
Income support mechanisms to USAC. FCC has indicated that it is 
considering this issue and consulting with the Office of Management and 
Budget. FCC should also identify any other actions that may constitute 
recordable obligations and ensure that those are properly recorded.

While we agree with FCC's determinations that the Universal Service 
Fund is a permanent appropriation subject to the Antideficiency Act and 
that its funding commitment decision letters constitute recordable 
obligations of the Universal Service Fund (see app. I), there are 
several significant fiscal law issues that remain unresolved. We 
believe that where FCC has determined that fiscal controls and policies 
do not apply, the commission should reconsider these determinations in 
light of the status of universal service monies as federal funds. For 
example, in view of its determination that the fund constitutes an 
appropriation, FCC needs to reconsider the applicability of the 
Miscellaneous Receipts Statue, 31 U.S.C.  3302, which requires that 
money received for the use of the United States be deposited in the 
Treasury unless otherwise authorized by law.[Footnote 22] FCC also 
needs to assess the applicability of other fiscal control and 
accountability statutes (e.g., the Single Audit Act and the Cash 
Management Improvement Act).[Footnote 23]

Another major issue that remains to be resolved involves the extent to 
which FCC has delegated some functions for the E-rate program to USAC. 
For example, are the disbursement policies and practices for the E-rate 
program consistent with statutory and regulatory requirements for the 
disbursement of public funds?[Footnote 24] Are some of the functions 
carried out by USAC, even though they have been characterized as 
administrative or ministerial, arguably inherently governmental 
activities[Footnote 25] that must be performed by government personnel? 
Resolving these issues in a comprehensive fashion, rather than 
continuing to rely on reactive, case-by-case determinations, is key to 
ensuring that FCC establishes the proper foundation of government 
accountability standards and safeguards for the E-rate program and the 
Universal Service Fund.

We are encouraged that FCC recently announced that it has contracted 
with the National Academy of Public Administration (NAPA) for NAPA to 
study the administration of the Universal Service Fund. NAPA will 
review the current status of the Universal Service Fund program as well 
as other similar governmental and quasi-governmental programs. Among 
other things, NAPA is to examine the pros and cons of continuing with 
the program's current structure or switching to an alternative model. 
NAPA is also to identify specific ways to improve the oversight and 
operation of the program, as well as any legislative or rule changes 
that would be needed to implement its recommendations. In addition, the 
review will identify internal controls in typical federal grant or 
subsidy programs that are not present in the Universal Service Fund 
program and determine whether the manner in which other analogous 
programs handle the holding, investment, and monitoring of program 
funds offers models for improving the operation of the Universal 
Service Fund.

We believe that NAPA's study will go a long way toward addressing the 
concerns outlined in our report, and we look forward to seeing the 
results of NAPA's efforts. Given this important ongoing study and the 
unresolved issues mentioned previously, Congress may wish to consider 
deferring a decision on permanently exempting the Universal Service 
Fund from the Antideficiency Act at this time and instead consider 
either granting the fund a two-or three-year exemption from the 
Antideficiency Act or crafting a limited exemption that would provide 
management flexibility. For example, Congress could specify that FCC 
could use certain receivables or assets as budgetary resources. These 
more limited solutions would allow time for the National Academy of 
Public Administration to complete its study of the Universal Service 
Fund program and report its findings to FCC. Congress and FCC could 
then comprehensively assess, based on decisions concerning the 
structure of the program, which federal requirements, policies, and 
practices should apply to the fund and to any entities administering 
the program. It could then be determined whether a permanent and 
complete exemption from the Antideficiency Act is warranted.

FCC Did Not Develop Useful Performance Goals and Measures for Assessing 
and Managing the E-Rate Program:

Although $13 billion in E-rate funding has been committed to 
beneficiaries during the past 7 years, FCC did not develop useful 
performance goals and measures to assess the specific impact of these 
funds on schools' and libraries' Internet access and to improve the 
management of the program, despite a recommendation by us in 1998 to do 
so. At the time of our current review, FCC staff was considering, but 
had not yet finalized, new E-rate goals and measures in response to 
OMB's concerns about this deficiency in a 2003 OMB assessment of the 
program.

One of the management tasks facing FCC is to establish strategic goals 
for the E-rate program, as well as annual goals linked to them. The 
Telecommunications Act of 1996 did not include specific goals for 
supporting schools and libraries, but instead used general language 
directing FCC to establish competitively neutral rules for enhancing 
access to advanced telecommunications and information services for all 
public and nonprofit private elementary and secondary school classrooms 
and libraries.[Footnote 26] As the agency accountable for the E-rate 
program, FCC is responsible under the Government Performance and 
Results Act of 1993 (Results Act) for establishing the program's long- 
term strategic goals and annual goals, measuring its own performance in 
meeting these goals, and reporting publicly on how well it is 
doing.[Footnote 27]

For fiscal years 2000 through 2002, FCC's goals focused on achieving 
certain percentage levels of Internet connectivity during a given 
fiscal year for schools, public school instructional classrooms, and 
libraries. However, the data that FCC used to report on its progress 
was limited to public schools (thereby excluding two other major groups 
of beneficiaries--private schools and libraries) and did not isolate 
the impact of E-rate funding from other sources of funding, such as 
state and local government. This is a significant measurement problem 
because, over the years, the demand for internal connections funding by 
applicants has exceeded the E-rate funds available for this purpose by 
billions of dollars. Unsuccessful applicants had to rely on other 
sources of support to meet their internal connection needs. Even with 
these E-rate funding limitations, there has been significant growth in 
Internet access for public schools since the program issued its first 
funding commitments in late 1998. At the time, according to data from 
the Department of Education's National Center for Educational 
Statistics (NCES), 89 percent of all public schools and 51 percent of 
public school instructional classrooms already had Internet access. By 
2002, 99 percent of public schools and 92 percent of public school 
instructional classrooms had Internet access.[Footnote 28] Yet although 
billions of dollars in E-rate funds have been committed since 1998, 
adequate program data was not developed to answer a fundamental 
performance question: How much of the increase since 1998 in public 
schools' Internet access has been a result of the E-rate program, as 
opposed to other sources of federal, state, local, and private funding?

Performance goals and measures are used not only to assess a program's 
impact but also to develop strategies for resolving mission-critical 
management problems. However, management-oriented goals have not been a 
feature of FCC's performance plans, despite long-standing concerns 
about the program's effectiveness in key areas. For example, two such 
goals--related to assessing how well the program's competitive bidding 
process was working and increasing program participation by low-income 
and rural school districts and rural libraries--were planned but not 
carried forward.

FCC did not include any E-rate goals for fiscal years 2003 and 2004 in 
its recent annual performance reports. The failure to measure 
effectively the program's impact on public and private schools and 
libraries over the past 7 years undercuts one of the fundamental 
purposes of the Results Act: to have federal agencies adopt a fact- 
based, businesslike framework for program management and 
accountability. The problem is not just a lack of data for accurately 
characterizing program results in terms of increasing Internet access. 
Other basic questions about the E-rate program also become more 
difficult to address, such as the program's efficiency and cost- 
effectiveness in supporting the telecommunications needs of schools and 
libraries. For example, a review of the program by OMB in 2003 
concluded that there was no way to tell whether the program has 
resulted in the cost-effective deployment and use of advanced 
telecommunications services for schools and libraries.[Footnote 29] OMB 
also noted that there was little oversight to ensure that the program 
beneficiaries were using the funding appropriately and effectively. In 
response to these concerns, FCC staff have been working on developing 
new performance goals and measures for the E-rate program and plan to 
finalize them and seek OMB approval in fiscal year 2005.

FCC's Oversight Mechanisms Are Not Fully Effective in Managing the E- 
Rate Program:

FCC testified before Congress in June 2004 that it relies on three 
chief components in overseeing the E-rate program: rulemaking 
proceedings, beneficiary audits, and fact-specific adjudicatory 
decisions (i.e., appeals decisions). We found weaknesses with FCC's 
implementation of each of these mechanisms, limiting the effectiveness 
of FCC's oversight of the program and the enforcement of program 
procedures to guard against waste, fraud, and abuse of E-rate funding.

FCC's Rulemakings Have Led to Problems with USAC's Procedures and 
Enforcement of Those Procedures:

As part of its oversight of the E-rate program, FCC is responsible for 
establishing new rules and policies for the program or making changes 
to existing rules, as well as providing the detailed guidance that USAC 
requires to effectively administer the program. FCC carries out this 
responsibility through its rulemaking process. FCC's E-rate 
rulemakings, however, have often been broadly worded and lacking 
specificity. Thus, USAC has needed to craft the more detailed 
administrative procedures necessary to implement the rules. However, in 
crafting administrative procedures, USAC is strictly prohibited under 
FCC rules from making policy, interpreting unclear provisions of the 
statute or rules, or interpreting the intent of Congress. We were told 
by FCC and USAC officials that USAC does not put procedures in place 
without some level of FCC approval. We were also told that this 
approval is sometimes informal, such as e-mail exchanges or telephone 
conversations between FCC and USAC staff. This approval can come in 
more formal ways as well, such as when the commission expressly 
endorses USAC operating procedures in commission orders or codifies 
USAC procedures into FCC's rules. However, two problems have arisen 
with USAC administrative procedures.

First, although USAC is prohibited under FCC rules from making policy, 
some USAC procedures deal with more than just ministerial details and 
arguably rise to the level of policy decisions. For example, in June 
2004, USAC was able to identify at least a dozen administrative 
procedures that, if violated by the applicant, would lead to complete 
or partial denial of the funding request even though there was no 
precisely corresponding FCC rule. The critical nature of USAC's 
administrative procedures is further illustrated by FCC's repeated 
codification of them throughout the history of the program. FCC's 
codification of USAC procedures--after those procedures have been put 
in place and applied to program participants--raises concerns about 
whether these procedures are more than ministerial and are, in fact, 
policy changes that should be coming from FCC in the first place. 
Moreover, in its August 2004 order (in a section dealing with the 
resolution of audit findings), the commission directs USAC to annually 
"identify any USAC administrative procedures that should be codified in 
our rules to facilitate program oversight." This process begs the 
question of which entity is really establishing the rules of the E-rate 
program and raises concerns about the depth of involvement by FCC staff 
with the management of the program.

Second, even though USAC procedures are issued with some degree of FCC 
approval, enforcement problems could arise when audits uncover 
violations of USAC procedures by beneficiaries or service providers. 
The FCC IG has expressed concern over situations where USAC 
administrative procedures have not been formally codified because 
commission staff have stated that, in such situations, there is 
generally no legal basis to recover funds from applicants that failed 
to comply with the USAC procedures. In its August 2004 order, the 
commission attempted to clarify the rules of the program with relation 
to recovery of funds. However, even under the August 2004 order, the 
commission did not clearly address the treatment of beneficiaries who 
violate a USAC administrative procedure that has not been codified.

FCC Has Been Slow to Address Problems Raised by Audit Findings:

FCC's use of beneficiary audits as an oversight mechanism has also had 
weaknesses, although FCC and USAC are now working to address some of 
these weaknesses. Since 2000, there have been 122 beneficiary audits 
conducted by outside firms, 57 by USAC staff, and 14 by the FCC IG (2 
of which were performed under agreement with the Inspector General of 
the Department of the Interior). Beneficiary audits are the most robust 
mechanism available to the commission in the oversight of the E-rate 
program, yet FCC generally has been slow to respond to audit findings 
and has not made full use of the audit findings as a means to 
understand and resolve problems within the program.

First, audit findings can indicate that a beneficiary or service 
provider has violated existing E-rate program rules. In these cases, 
USAC or FCC can seek recovery of E-rate funds, if justified.[Footnote 
30] In the FCC IG's May 2004 Semiannual Report, however, the IG 
observes that audit findings are not being addressed in a timely manner 
and that, as a result, timely action is not being taken to recover 
inappropriately disbursed funds.[Footnote 31] The IG notes that in some 
cases the delay is caused by USAC and, in other cases, the delay is 
caused because USAC is not receiving timely guidance from the 
commission (USAC must seek guidance from the commission when an audit 
finding is not a clear violation of an FCC rule or when policy 
questions are raised). Regardless, the recovery of inappropriately 
disbursed funds is important to the integrity of the program and needs 
to occur in a timely fashion.

Second, under GAO's Standards for Internal Controls in the Federal 
Government,[Footnote 32] agencies are responsible for promptly 
reviewing and evaluating findings from audits, including taking action 
to correct a deficiency or taking advantage of the opportunity for 
improvement. Thus, if an audit shows a problem but no actual rule 
violation, FCC should be examining why the problem arose and 
determining if a rule change is needed to address the problem (or 
perhaps simply addressing the problem through a clarification to 
applicant instructions or forms). FCC has been slow, however, to use 
audit findings to make programmatic changes. For example, several 
important audit findings from the 1998 program year were only recently 
resolved by an FCC rulemaking in August 2004.

In its August 2004 order, the commission concluded that a standardized, 
uniform process for resolving audit findings was necessary, and 
directed USAC to submit to FCC a proposal for resolving audit findings. 
FCC also instructed USAC to specify deadlines in its proposal "to 
ensure audit findings are resolved in a timely manner."[Footnote 33] 
USAC submitted its Proposed Audit Resolution Plan to FCC on October 28, 
2004. The plan memorializes much of the current audit process and 
provides deadlines for the various stages of the audit process. FCC 
released the proposed audit plan for public comment in December 
2004.[Footnote 34]

In addition to the Proposed Audit Resolution Plan, the commission 
instructed USAC to submit a report to FCC on a semiannual basis 
summarizing the status of all outstanding audit findings. The 
commission also stated that it expects USAC to identify for commission 
consideration on at least an annual basis all audit findings raising 
management concerns that are not addressed by existing FCC rules. 
Lastly, the commission took the unusual step of providing a limited 
delegation to the Wireline Competition Bureau (the bureau within FCC 
with the greatest share of the responsibility for managing the E-rate 
program) to address audit findings and to act on requests for waiver of 
rules warranting recovery of funds.[Footnote 35] These actions could 
help ensure, on a prospective basis, that audit findings are more 
thoroughly and quickly addressed. However, much still depends on timely 
action being taken by FCC, particularly if audit findings suggest the 
need for a rulemaking.

In addition to problems with responding to audit findings, the audits 
conducted to date have been of limited use because neither FCC nor USAC 
have conducted an audit effort using a statistical approach that would 
allow them to project the audit results to all E-rate beneficiaries. 
Thus, at present, no one involved with the E-rate program has a basis 
for making a definitive statement about the amount of waste, fraud, and 
abuse in the program.[Footnote 36] Of the various groups of beneficiary 
audits conducted to date, all were of insufficient size and design to 
analyze the amount of fraud or waste in the program or the number of 
times that any particular problem might be occurring programwide. At 
the time we concluded our review, FCC and USAC were in the process of 
soliciting and reviewing responses to a Request for Proposal for audit 
services to conduct additional beneficiary audits.

FCC Has Been Slow to Act on Some E-Rate Appeals:

Under FCC's rules, program participants can seek review of USAC's 
decisions,[Footnote 37] although FCC's appeals process for the E-rate 
program has been slow in some cases. Because appeals decisions are used 
as precedent, this slowness adds uncertainty to the program and impacts 
beneficiaries. FCC rules state that FCC is to decide appeals within 90 
days, although FCC can extend this period. At the time of our review 
there was a substantial appeals backlog at FCC (i.e., appeals pending 
for longer than 90 days). Out of 1,865 appeals to FCC from 1998 through 
the end of 2004, approximately 527 appeals remain undecided, of which 
458 (25 percent) are backlog appeals.[Footnote 38]

We were told by FCC officials that some of the backlog is due to 
staffing issues. FCC officials said they do not have enough staff to 
handle appeals in a timely manner. FCC officials also noted that there 
has been frequent staff turnover within the E-rate program, which adds 
some delay to appeals decisions because new staff necessarily take time 
to learn about the program and the issues. Additionally, we were told 
that another factor contributing to the backlog is that the appeals 
have become more complicated as the program has matured. Lastly, some 
appeals may be tied up if the issue is currently in the rulemaking 
process.

The appeals backlog is of particular concern given that the E-rate 
program is a technology program. An applicant who appeals a funding 
denial and works through the process to achieve a reversal and funding 
two years later might have ultimately won funding for outdated 
technology. FCC officials told us that they are working to resolve all 
backlogged E-rate appeals by the end of calendar year 2005.

Summary:

In summary, we remain concerned that FCC has not done enough to 
proactively manage and provide a framework of government accountability 
for the multibillion-dollar E-rate program. Lack of clarity about what 
accountability standards apply to the program causes confusion among 
program participants and can lead to situations where funding 
commitments are interrupted pending decisions about applicable law, 
such as happened with the Antideficiency Act in the fall of 2004. 
Ineffective performance goals and measures make it difficult to assess 
the program's effectiveness and chart its future course. Weaknesses in 
oversight and enforcement can lead to misuse of E-rate funding by 
program participants that, in turn, deprives other schools and 
libraries whose requests for support were denied due to funding 
limitations.

To address these management and oversight problems identified in our 
review of the E-rate program, our report recommends that the Chairman 
of FCC direct commission staff to (1) conduct and document a 
comprehensive assessment to determine whether all necessary government 
accountability requirements, policies, and practices have been applied 
and are fully in place to protect the E-rate program and universal 
service funding; (2) establish meaningful performance goals and 
measures for the E-rate program; and (3) develop a strategy for 
reducing the E-rate program's appeals backlog, including ensuring that 
adequate staffing resources are devoted to E-rate appeals.

We provided a draft of our report to FCC for comment. FCC said that it 
took a number of steps in 2004 to improve its management and oversight 
of the program, and anticipates taking additional steps during the 
coming year. FCC concurred with our recommendations on establishing 
performance goals and measures and developing a strategy for reducing 
the backlog of appeals. FCC did not concur with our recommendation that 
it conduct a comprehensive assessment concerning the applicability of 
government accountability requirements, policies, and practices. FCC 
maintains that it has already done so on a case-by-case basis. As noted 
in our report, however, we believe that major issues remain unresolved, 
such as the implications of FCC's determination that the Universal 
Service Fund constitutes an appropriation under the current structure 
of the E-rate program and the extent to which FCC has delegated some 
program functions to USAC.

Scope and Methodology:

We conducted our work from December 2003 through December 2004 in 
accordance with generally accepted government auditing standards. We 
interviewed officials from FCC's Wireline Competition Bureau, 
Enforcement Bureau, Office of General Counsel, Office of Managing 
Director, Office of Strategic Planning and Policy Analysis, and Office 
of Inspector General. We also interviewed officials from USAC. In 
addition, we interviewed officials from OMB and the Department of 
Education regarding performance goals and measures. OMB had conducted 
its own assessment of the E-rate program in 2003, which we also 
discussed with OMB officials. We reviewed and analyzed FCC, USAC, and 
OMB documents related to the management and oversight of the E-rate 
program. The information we gathered was sufficiently reliable for the 
purposes of our review. See our full report for a more detailed 
explanation of our scope and methodology.

This concludes my prepared statement. I would be pleased to respond to 
any questions that you or other Members of the Committee may have.

GAO Contact and Staff Acknowledgments:

For further information about this testimony, please contact me at 
(202) 512-2834. Edda Emmanuelli-Perez, John Finedore, Faye Morrison, 
and Mindi Weisenbloom also made key contributions to this statement.

[End of section]

Appendix I: Fiscal Law Issues Involving the Universal Service Fund:

There have been questions from the start of the E-rate program 
regarding the nature of the Universal Service Fund (USF) and the 
applicability of managerial, fiscal, and financial accountability 
requirements to USF. FCC has never clearly determined the nature of 
USF, and the Office of Management and Budget (OMB), the Congressional 
Budget Office (CBO), and GAO have at various times noted that USF has 
not been recognized or treated as federal funds for several 
purposes.[Footnote 39] However, FCC has never confronted or assessed 
these issues in a comprehensive fashion and has only recently begun to 
address a few of these issues. In particular, FCC has recently 
concluded that as a permanent indefinite appropriation, USF is subject 
to the Antideficiency Act and its funding commitment decision letters 
constitute obligations for purposes of the Antideficiency Act. As 
explained below, we agree with FCC's determination. However, FCC's 
conclusions concerning the status of USF raise further issues related 
to the collection, deposit, obligation, and disbursement of those 
funds--issues that FCC needs to explore and resolve.

Background:

Universal service has been a basic goal of telecommunications 
regulation since the 1950s, when FCC focused on increasing the 
availability of reasonably priced, basic telephone service. See Texas 
Office of Public Utility Counsel v. FCC, 183 F.3d 393, 405-406 (5TH 
Cir., 1999), cert. denied sub nom; Celpage Inc. v. FCC, 530 U.S. 1210 
(2000). FCC has not relied solely on market forces, but has used a 
combination of explicit and implicit subsidies to achieve this goal. 
Id. Prior to 1983, FCC used the regulation of AT&T's internal rate 
structure to garner funds to support universal service. With the 
breakup of AT&T in 1983, FCC established a Universal Service Fund 
administered by the National Exchange Carrier Association (NECA). NECA 
is an association of incumbent local telephone companies, also 
established at the direction of the FCC. Among other things, NECA was 
to administer universal service through interstate access tariffs and 
the revenue distribution process for the nation's local telephone 
companies. At that time, NECA, a nongovernmental entity, privately 
maintained the Universal Service Fund outside the U.S. Treasury.

Section 254 of the Telecommunications Act of 1996 codified the concept 
of universal service and expanded it to include support for acquisition 
by schools and libraries of telecommunications and Internet services. 
Pub. L. No. 104-104,  254, 110 Stat. 56 (1996) (classified at 47 
U.S.C.  254). The act defines universal service, generally, as a level 
of telecommunications services that FCC establishes periodically after 
taking into account various considerations, including the extent to 
which telecommunications services are essential to education, public 
health, and public safety. 47 U.S.C.  254 (c)(1). The act also 
requires that "every telecommunications carrier that provides 
interstate telecommunications services shall contribute . . . to the 
specific, predictable, and sufficient mechanisms" established by FCC 
"to preserve and advance universal service." Id., 254 (d). The act did 
not specify how FCC was to administer the E-rate program, but required 
FCC, acting on the recommendations of the Federal-State Joint Board, to 
define universal service and develop specific, predictable, and 
equitable support mechanisms.

FCC designated the Universal Services Administrative Company (USAC), a 
nonprofit corporation that is a wholly owned subsidiary of NECA, as the 
administrator of the universal service mechanisms.[Footnote 40] USAC 
administers the program pursuant to FCC orders, rules, and directives. 
As part of its duties, USAC collects the carriers' universal service 
contributions, which constitute the Universal Service Fund, and 
deposits them to a private bank account under USAC's control and in 
USAC's name. FCC has directed the use of USF to, among other things, 
subsidize advanced telecommunications services for schools and 
libraries in a program commonly referred to as the E-rate 
program.[Footnote 41] Pursuant to the E-rate program, eligible schools 
and libraries can apply annually to receive support and can spend the 
funding on specific eligible services and equipment, including 
telephone services, Internet access services, and the installation of 
internal wiring and other related items. Generally, FCC orders, rules, 
and directives, as well as procedures developed by USAC, establish the 
program's criteria. USAC carries out the program's day-to-day 
operations, such as answering inquiries from schools and libraries; 
processing and reviewing applications; making funding commitment 
decisions and issuing funding commitment decision letters; and 
collecting, managing, investing, and disbursing E-rate funds.

Eligible schools and libraries may apply annually to receive E-rate 
support. The program places schools and libraries into various discount 
categories, based on indicators of need. As a result of the application 
of the discount rate to the cost of the service, the school or library 
pays a percentage of the cost for the service and the E-rate program 
covers the remainder. E-rate discounts range from 20 percent to 90 
percent.

Once the school or library has complied with the program's requirements 
and entered into agreements with vendors for eligible services, the 
school or library must file a form with USAC noting the types and costs 
of the services being contracted for, the vendors providing the 
services, and the amount of discount being requested. USAC reviews the 
forms and issues funding commitment decision letters.[Footnote 42] The 
funding commitment decision letters notify the applicants of the 
decisions regarding their E-rate discounts. These funding commitment 
decision letters also notify the applicants that USAC will send the 
information on the approved E-rate discounts to the providers so that 
"preparations can be made to begin implementing . . . E-rate 
discount(s) upon the filing [by the applicant] of . . . Form 486." The 
applicant files FCC Form 486 to notify USAC that services have started 
and USAC can pay service provider invoices. Generally, the service 
provider seeks reimbursement from USAC for the discounted portion of 
the service, although the school or library also could pay the service 
provider in full and then seek reimbursement from USAC for the discount 
portion.

What Is the Universal Service Fund?

The precise phrasing of the questions regarding the nature of USF has 
varied over the years, including asking whether they are federal funds, 
appropriated funds, or public funds and, if so, for what purposes? 
While the various fiscal statutes may use these different terms to 
describe the status of funds, we think the fundamental issue is what 
statutory controls involving the collection, deposit, obligation, and 
disbursement of funds apply to USF. As explained below, funds that are 
appropriated funds are subject, unless specifically exempted by law, to 
a variety of statutory provisions providing a scheme of funds controls. 
See B-257525, Nov. 30, 1994; 63 Comp. Gen. 31 (1983); 35 Comp. Gen. 436 
(1956); B-204078.2, May 6, 1988. On the other hand, funds that are not 
appropriated funds are not subject to such controls unless the law 
specifically applies such controls. Thus, we believe the initial 
question is whether USF funds are appropriated funds.

FCC has concluded that USF constitutes a permanent indefinite 
appropriation. We agree with FCC's conclusion. Typical language of 
appropriation identifies a fund or account as an appropriation and 
authorizes an agency to enter into obligations and make disbursements 
out of available funds. For example, Congress utilizes such language in 
the annual appropriations acts. See 1 U.S.C.  105 (requiring regular 
annual appropriations acts to bear the title "An Act making 
appropriations. . ."). Congress, however, appropriates funds in a 
variety of ways other than in regular annual appropriation 
acts.[Footnote 43] Indeed, our decisions and those of the courts so 
recognize.

Thus, a statute that contains a specific direction to pay, and a 
designation of funds to be used, constitutes an appropriation. 63 Comp. 
Gen. 331 (1984); 13 Comp. Gen. 77 (1933). In these statutes, Congress 
(1) authorizes the collection of fees and their deposit into a 
particular fund, and (2) makes the fund available for expenditure for a 
specified purpose without further action by Congress. This authority to 
obligate or expend collections without further congressional action 
constitutes a continuing appropriation or a permanent appropriation of 
the collections. E.g., United Biscuit Co. v. Wirtz, 359 F.2d 206, 212 
(D.C. Cir. 1965), cert. denied, 384 U.S. 971 (1966); 69 Comp. Gen. 260, 
262 (1990); 73 Comp. Gen. 321 (1994). Our decisions are replete with 
examples of permanent appropriations, such as revolving funds and 
various special deposit funds, including mobile home inspection fees 
collected by the Secretary of Housing and Urban Development,[Footnote 
44] licensing revenues received by the Commission on the 
Bicentennial,[Footnote 45] tolls and other receipts deposited in the 
Panama Canal Revolving Fund,[Footnote 46] user fees collected by the 
Saint Lawrence Seaway Development Corporation,[Footnote 47] user fees 
collected from tobacco producers to provide tobacco inspection, 
certification and other services,[Footnote 48] and user fees collected 
from firms using the Department of Agriculture's meat grading 
services.[Footnote 49] It is not essential for Congress to expressly 
designate a fund as an appropriation or to use literal language of 
"appropriation," so long as Congress authorizes the expenditure of fees 
or receipts collected and deposited to a specific account or 
fund.[Footnote 50] In cases where Congress does not intend these types 
of collections or funds to be considered "appropriated funds," it 
explicitly states that in law. See e.g., 12 U.S.C.  244 (the Federal 
Reserve Board levies assessments on its member banks to pay for its 
expenses and "funds derived from such assessments shall not be 
construed to be government funds or appropriated moneys"); 12 U.S.C.  
1422b(c) (the Office of Federal Housing Enterprise Oversight levies 
assessments upon the Federal Home Loan Banks and from other sources to 
pay its expenses, but such funds "shall not be construed to be 
government funds or appropriated monies, or subject to apportionment 
for the purposes of chapter 15 of title 31, or any other authority").

Like the above examples, USF's current authority stems from a 
statutorily authorized collection of fees from telecommunication 
carriers, and expenditures for a specified purpose--that is, the 
various types of universal service.[Footnote 51] Thus, USF meets both 
elements of the definition of a permanent appropriation.

We recognize that prior to the passage of the Telecommunications Act of 
1996, there existed an administratively sanctioned universal service 
fund. With the Telecommunications Act of 1996, Congress specifically 
expanded the contribution base of the fund, statutorily mandated 
contributions into the fund, and designated the purposes for which the 
monies could be expended. These congressional actions established USF 
in a manner that meets the elements for a permanent appropriation and 
Congress did not specify that USF should be considered anything other 
than an appropriation.[Footnote 52]

Does the Antideficiency Act Apply to USF?

Appropriated funds are subject to a variety of statutory controls and 
restrictions. These controls and restrictions, among other things, 
limit the purposes for which they may be used and provide a scheme of 
funds control. See e.g., 63 Comp. Gen. 110 (1983); B-257525, Nov. 30, 
1994; B-228777, Aug. 26, 1988; B-223857, Feb. 27, 1987; 35 Comp. Gen. 
436 (1956). A key component of this scheme of funds control is the 
Antideficiency Act. B-223857, Feb. 27, 1987. The Antideficiency 
Act[Footnote 53] has been termed "the cornerstone of congressional 
efforts to bind the executive branch of government to the limits on 
expenditure of appropriated funds."[Footnote 54] Primarily, the purpose 
of the Antideficiency Act is to prevent the obligation and expenditure 
of funds in excess of the amounts available in an appropriation or in 
advance of the appropriation of funds. 31 U.S.C.  1341(a)(1). FCC has 
determined that the Antideficiency Act applies to USF, and as explained 
below, we agree with FCC's conclusion.

The Antideficiency Act applies to "officer[s] or employee[s] of the 
United States Government . . . mak[ing] or authoriz[ing] an expenditure 
or obligation . . . from an appropriation or fund." 31 U.S.C.  
1341(a). As established above, USF is an "appropriation or fund." The 
fact that USAC, a private entity whose employees are not federal 
officers or employees, is the administrator of the E-rate program and 
obligates and disburses funds from USF is not dispositive of the 
application of the Antideficiency Act. This is because, as the FCC 
recognizes, it, not USAC, is the entity that is legally responsible for 
the management and oversight of the E-rate program and FCC's employees 
are federal officers and employees of the United States subject to the 
Antideficiency Act.[Footnote 55]

Where entities operate with funds that are regarded as appropriated 
funds, such as some government corporations, they, too, are subject to 
the Antideficiency Act. See e.g., B-223857, Feb. 27, 1987 (funds 
available to Commodity Credit Corporation pursuant to borrowing 
authority are subject to Antideficiency Act); B-135075-O.M., Feb. 14, 
1975 (Inter-American Foundation). The Antideficiency Act applies to 
permanent appropriations such as revolving funds[Footnote 56] and 
special funds. 72 Comp. Gen. 59 (1992) (Corps of Engineers Civil Works 
Revolving Fund subject to Antideficiency Act); B-120480, Sep. 6, 1967, 
B-247348, June 22, 1992, and B-260606, July 25, 1997 (GPO revolving 
funds subject to Antideficiency Act); 71 Comp. Gen. 224 (1992) (special 
fund that receives fees, reimbursements, and advances for services 
available to finance its operations is subject to Antideficiency Act).

Where Congress intends for appropriated funds to be exempt from the 
application of statutory controls on the use of appropriations, 
including the Antideficiency Act, it does so expressly. See e.g., B- 
193573, Jan. 8, 1979; B-193573, Dec. 19, 1979; B-217578, Oct. 16, 1986 
(Saint Lawrence Seaway Development Corporation has express statutory 
authority to determine the character and necessity of its obligations 
and is therefore exempt from many of the restrictions on the use of 
appropriated funds that would otherwise apply); B-197742, Aug. 1, 1986 
(Price-Anderson Act expressly exempts the Nuclear Regulatory Commission 
from Antideficiency Act prohibition against obligations or expenditures 
in advance or in excess of appropriations). There is no such exemption 
for FCC or USF from the prohibitions of the Antideficiency Act. Thus, 
USF is subject to the Antideficiency Act.

Do the Funding Commitment Decision Letters Issued to Schools and 
Libraries Constitute Obligations?

An important issue that arises from the application of the 
Antideficiency Act to USF is what actions constitute obligations 
chargeable against the fund. Understanding the concept of an obligation 
and properly recording obligations are important because an obligation 
serves as the basis for the scheme of funds control that Congress 
envisioned when it enacted fiscal laws such as the Antideficiency Act. 
B-300480, Apr. 9, 2003. For USF's schools and libraries program, one of 
the main questions is whether the funding commitment decision letters 
issued to schools and libraries are properly regarded as obligations. 
FCC has determined that funding commitment decision letters constitute 
obligations. And again, as explained below, we agree with FCC's 
determination.

Under the Antideficiency Act, an agency may not incur an obligation in 
excess of the amount available to it in an appropriation or fund. 31 
U.S.C.  1341(a). Thus, proper recording of obligations with respect to 
the timing and amount of such obligations permits compliance with the 
Antideficiency Act by ensuring that agencies have adequate budget 
authority to cover all of their obligations.[Footnote 57] B-300480, 
Apr. 9, 2003. We have defined an "obligation" as a "definite commitment 
that creates a legal liability of the government for the payment of 
goods and services ordered or received." Id. A legal liability is 
generally any duty, obligation or responsibility established by a 
statute, regulation, or court decision, or where the agency has agreed 
to assume responsibility in an interagency agreement, settlement 
agreement or similar legally binding document. Id. citing to Black's 
Law Dictionary 925 (7TH ed. 1999). The definition of "obligation" also 
extends to "[a] legal duty on the part of the United States which 
constitutes a legal liability or which could mature into a legal 
liability by virtue of actions on the part of the other party beyond 
the control of the United States. . . ." Id. citing to 42 Comp. Gen. 
733 (1963); see also McDonnell Douglas Corp. v. United States, 37 Fed. 
Cl. 295, 301 (1997).

The funding commitment decision letters provided to applicant schools 
and libraries notify them of the decisions regarding their E-rate 
discounts. In other words, it notifies them whether their funding is 
approved and in what amounts. The funding commitment decision letters 
also notify schools and libraries that the information on the approved 
E-rate discounts is sent to the providers so that "preparations can be 
made to begin implementing . . . E-rate discount(s) upon the filing [by 
applicants] of . . . Form 486." The applicant files FCC Form 486 to 
notify USAC that services have started and USAC can pay service 
provider invoices. At the time a school or library receives a funding 
commitment decision letter, the FCC has taken an action that accepts a 
"legal duty . . . which could mature into a legal liability by virtue 
of actions on the part of the grantee beyond the control of the United 
States." Id. citing 42 Comp. Gen. 733, 734 (1963). In this instance, 
the funding commitment decision letter provides the school or library 
with the authority to obtain services from a provider with the 
commitment that it will receive a discount and the provider will be 
reimbursed for the discount provided. While the school or library could 
decide not to seek the services or the discount, so long as the funding 
commitment decision letter remains valid and outstanding, USAC and FCC 
no longer control USF's liability; it is dependent on the actions taken 
by the other party--that is, the school or library. In our view, a 
recordable USF obligation is incurred at the time of issuance of the 
funding commitment decision letter indicating approval of the 
applicant's discount. Thus, these obligations should be recorded in the 
amounts approved by the funding commitment decision letters. If at a 
later date, a particular applicant uses an amount less than the maximum 
or rejects funding, then the obligation amount can be adjusted or 
deobligated, respectively.

Additional issues that remain to be resolved by FCC include whether 
other actions taken in the universal service program constitute 
obligations and the timing of and amounts of obligations that must be 
recorded. For example, this includes the projections and data 
submissions by USAC to FCC and by participants in the High Cost and Low 
Income Support Mechanisms to USAC. FCC has indicated that it is 
considering this issue and consulting with the Office of Management and 
Budget. FCC should also identify any other actions that may constitute 
recordable obligations and ensure those are properly recorded. 

FOOTNOTES

[1] Telecommunications: Greater Involvement Needed by FCC in the 
Management and Oversight of the E-Rate Program, GAO-05-151 (Washington, 
D.C.: Feb. 9, 2005). The report is available on GAO's Web site at 
www.gao.gov.

[2] 47 U.S.C.  254(h)(1)(B).

[3] 47 U.S.C.  254(h)(2).

[4] The Federal-State Joint Board on Universal Service was established 
in March 1996 to make recommendations to implement the universal 
service provisions of the Telecommunications Act of 1996. The board is 
composed of FCC commissioners, state utility commissioners, and a 
consumer advocate representative.

[5] These companies include providers of local and long distance 
telephone services, wireless telephone services, paging services, and 
pay phone services. 47 C.F.R.  54.706. Along with the E-rate program, 
other universal service programs under the Universal Service Fund are 
the High Cost program, the Low Income program, and the Rural Health 
Care program. The High Cost program assists customers living in high- 
cost, rural, or remote areas through financial support to telephone 
companies, thereby lowering rates for local and long distance service. 
The Low Income program assists qualifying low-income consumers through 
discounted installation and monthly telephone services and free toll 
limitation service. The Rural Health Care program assists health care 
providers located in rural areas through discounts for 
telecommunications services. These four programs are sometimes 
collectively referred to as the Universal Service Fund program. For 
more information on the various universal service programs, see GAO, 
Telecommunications: Federal and State Universal Service Programs and 
Challenges to Funding, GAO-02-187 (Washington, D.C.: Feb. 4, 2002).

[6] The line item is called various things by various companies, such 
as the "federal universal service fee" or the "universal connectivity 
fee." Some companies do not separate out universal service costs as a 
line item, but instead just build it into their overall costs. Either 
way, consumers ultimately pay for the various universal service 
programs, including E-rate.

[7] USAC was established at the direction of FCC and operates under 
FCC's rules and policies.

[8] See S.1768, 105th Cong.,  2004(b)(2)(A) (1998).

[9] 47 C.F.R.  54.702(c). 

[10] Eligibility of schools and libraries is defined at 47 U.S.C.  
254. Generally, educational institutions that meet the definition of 
"schools" in the Elementary and Secondary Education Act of 1965 are 
eligible to participate, as are libraries that are eligible to receive 
assistance from a state's library administrative agency under the 
Library Services and Technology Act. Examples of entities not eligible 
for support are home school programs, private vocational programs, and 
institutions of higher education. In addition, neither private schools 
with endowments of more than $50 million nor libraries whose budgets 
are part of a school's budget are eligible to participate. 20 U.S.C.  
9122.

[11] The school or library could also pay the service provider in full 
and then seek reimbursement from USAC for the discount portion.

[12] USAC was appointed the permanent administrator subject to a review 
after one year by FCC to determine that the universal service programs 
were being administered in an efficient, effective, and competitively 
neutral manner. 47 C.F.R.  54.701(a). This review was never conducted. 

[13] The Universal Service Fund is included in the federal budget as a 
special fund. OMB concluded that the Fund does not constitute public 
money subject to the Miscellaneous Receipts Statute, 31 U.S.C.  3302, 
and therefore can be maintained outside the Treasury by a 
nongovernmental manager. Letter from Mr. Robert G. Damus, OMB General 
Counsel to Mr. Christopher Wright, FCC General Counsel, dated April 28, 
2000. 

[14] See 31 U.S.C.  331, 3301-3305 and the Treasury Financial Manual, 
vol. I, which instructs federal agencies in areas of central accounting 
and reporting, disbursing, deposit regulations, and other fiscal 
matters necessary for the financial accounting and reporting of all 
receipts and disbursements of the federal government. 

[15] As set forth in part 31 of the Code of Federal Regulations or the 
Treasury Financial Manual.

[16] 63 Comp. Gen. 331 (1984); 13 Comp. Gen. 77 (1933).

[17] E.g., United Biscuit Co. v. Wirtz, 359 F.2d 206, 212 (D.C. Cir. 
1965), cert. denied, 384 U.S. 971 (1966); 69 Comp. Gen. 260, 262 
(1990); 73 Comp. Gen. 321 (1994). 

[18] An "obligation" is an action that creates a legal liability or 
definite commitment on the part of the government to make a 
disbursement at some later date.

[19] According to USAC, the Universal Service Fund was invested in a 
variety of securities, including cash and cash equivalents, government 
and government-backed securities, and high-grade commercial paper. USAC 
generally did not seek the approval of the commission on particular 
investments, although investments were made with FCC knowledge and 
oversight through formal audits and informal meetings and review. 

[20] Universal Service Antideficiency Temporary Suspension Act, Pub. L. 
No. 108-494,  302, 118 Stat. 3986 (2004). The law exempts universal 
service monies from the Antideficiency Act until December 31, 2005.

[21] See B-300480, April 9, 2003. 

[22] Because OMB and FCC had believed the funds were not public monies 
"for the use of the United States" under the Miscellaneous Receipts 
Statute, neither OMB nor FCC viewed the Universal Service Fund as 
subject to that statute.

[23] For example, in October 2003, when the FCC ordered USAC to comply 
with GovGAAP, it noted that the Universal Service Fund was subject to 
the Debt Collection Improvement Act of 1996. In that same order, FCC 
stated that "the funds may be subject to a number of federal financial 
and reporting statutes" (emphasis added) and "relevant portions of the 
Federal Financial Management Improvement Act of 1996," but did not 
specify which specific statutes or the relevant portions or further 
analyze their applicability. FCC officials also told us that it was 
uncertain whether procurement requirements such as the Federal 
Acquisition Regulation (FAR) applied to arrangements between FCC and 
USAC, but they recommended that those requirements be followed as a 
matter of policy.

[24] See 31 U.S.C.  3321, 3322, 3325, and the Treasury Financial 
Manual.

[25] See OMB Circular A-76, May 29, 2003, which defines an inherently 
governmental activity as requiring "the exercise of substantial 
discretion in applying government authority and/or in making decisions 
for the government." OMB Cir. A-76, Attachment A. Inherently 
governmental activities include the establishment of procedures and 
processes related to the oversight of monetary transactions or 
entitlements. OMB Circular A-76 further states that "[e]xerting 
ultimate control over the acquisition, use or disposition of United 
States government property . . . including establishing policies or 
procedures for the collection, control, or disbursement of appropriated 
and other federal funds" involves an inherently governmental activity. 

[26] 47 U.S.C.  254(h)(2)(A). 

[27] For additional details on the Results Act and its requirements, 
see GAO, Executive Guide: Effectively Implementing the Government 
Performance and Results Act, GAO/GGD-96-118 (Washington, D.C.: June 
1996). GAO first noted the lack of clear and specific E-rate 
performance goals and measures in its July 1998 testimony before the 
Senate Committee on Commerce, Science, and Transportation. See GAO, 
Schools and Libraries Corporation: Actions Needed to Strengthen Program 
Integrity Operations before Committing Funds, GAO/T-RCED-98-243 
(Washington, D.C.: July 16, 1998), pp. 15-16.

[28] See NCES, Internet Access in U.S. Public Schools and Classrooms: 
1994-2002, NCES-2004-011 (Washington, D.C.; October 2003). This was the 
most recent update available at the time of our review.

[29] OMB reviewed E-rate using its Program Assessment Rating Tool 
(PART), which is a diagnostic tool intended to provide a consistent 
approach to evaluating federal programs as part of the executive budget 
formulation process. 

[30] USAC, through its duties as administrator of the fund, initially 
seeks recovery of erroneously disbursed funds. In addition, the 
commission adopted rules in April 2003 to provide for suspension and 
debarment from the program for persons convicted of criminal violations 
or held civilly liable for certain acts arising from their E-rate 
participation. Debarments would be for a period of three years unless 
circumstances warrant a longer debarment period in order to protect the 
public interest. 

[31] See FCC, Office of the Inspector General Semiannual Report to 
Congress, October 1, 2003--March 31, 2004 (Washington, D.C.; May 3, 
2004).

[32] GAO/AIMD-00-21.3.1.

[33] FCC, Fifth Report and Order, In the Matter of Schools and 
Libraries Universal Service Support Mechanism, FCC-04-190 (Washington, 
D.C.; Aug. 13, 2004), para. 74.

[34] Comments were due January 5, 2005; reply comments were due January 
20, 2005.

[35] FCC 04-190, para. 75. 

[36] In testimony before the House Subcommittee on Oversight and 
Investigations of the Committee on Energy and Commerce in June 2004, 
FCC's Inspector General submitted a prepared statement that said the 
"results of audits that have been performed and the allegations under 
investigation lead us to believe the program may be subject to 
unacceptably high risk of fraud, waste and abuse." At the same hearing, 
the Chief of FCC's Office of Strategic Planning and Policy Analysis and 
the Deputy Chief of FCC's Wireline Competition Bureau submitted a 
prepared statement that said that FCC had "enabled implementation of 
the [E-rate] statutory goals with a minimum of fraud, waste, and abuse."

[37] Virtually all of the decisions made by FCC and USAC in their 
management and administration of the E-rate program may be subject to 
petition for reconsideration or appeal by beneficiaries. Moreover, 
schools and libraries have the option of multiple appeal levels, 
including USAC, the Wireline Competition Bureau, and the commission.

[38] The bulk of the appeals are to USAC, which received a total of 
16,782 appeals from the beginning of the program through 2003. Of 
these, 646--roughly 4 percent--remained undecided as of September 20, 
2004.

[39] See GAO, Schools and Libraries Program: Application and Invoice 
Review Procedures Need Strengthening, GAO-01-105, 41. FCC's IG has also 
raised questions regarding the nature of USF. FCC's IG first looked at 
USF in 1999 as part of its audit of the commission's fiscal year 1999 
financial statement. During that audit, the FCC IG questioned 
commission staff regarding the nature of the fund and, specifically, 
whether USF was subject to the statutory and regulatory requirements 
for federal funds. In the next year's audit, the FCC IG noted that the 
commission could not ensure that USF activities were in compliance with 
all laws and regulations because the issue of which laws and 
regulations were applicable to USF was still unresolved at the end of 
the audit. In the FCC IG's reports on FCC's financial statements from 
fiscal years 1999 to 2003, the IG consistently recommended that FCC 
management formally define in writing the financial management roles 
and responsibilities of FCC and USAC to avoid confusion and 
misunderstanding. 

[40] In 1998, we issued a legal opinion on the then-current structure 
of the E-rate program where FCC directed the creation of the Schools 
and Libraries Corporation to administer the universal service program. 
Under the Government Corporation Control Act, an agency must have 
specific statutory authority to establish a corporation. 31 U.S.C.  
9102. We concluded that FCC did not have authority to create a separate 
independent corporation to administer the E-rate program. B-278820, 
Feb. 10, 1998. Subsequently, FCC eliminated the Schools and Libraries 
Corporation as a separate entity, and restructured the universal 
service program to its present form. 

[41] The term "E-rate" evolved from some individuals referring to the 
program as the "Education" rate. 

[42] USAC could reduce the amount requested if the school or library 
has included ineligible services in its application or has calculated 
its discount category incorrectly.

[43] Congress has recognized that an appropriation is a form of budget 
authority that makes funds available to an agency to incur obligations 
and make expenditures in a number of different statutes. For example, 
see 2 U.S.C.  622(2)(A)(i) (budget authority includes "provisions of 
law that make funds available for obligation and expenditure . . . 
including the authority to obligate and expend the proceeds of 
offsetting receipts and collections") and 31 U.S.C.  701(2)(C) 
(appropriations include "other authority making amounts available for 
obligation or expenditure"). 

[44] 59 Comp. Gen. 215 (1980).

[45] B-228777, Aug. 26, 1988.

[46] B-204078.2, May 6, 1988 and B-257525, Nov. 30, 1994.

[47] B-193573, Jan. 8, 1979; B-193573, Dec. 19, 1979; B-217578, Oct. 
16, 1986.

[48] 63 Comp. Gen. 285 (1984). 

[49] B-191761, Sept. 22, 1978.

[50] B-193573, Dec. 19, 1979.

[51] The United States Court of Appeals for the Fifth Circuit has 
recognized the governmental character of the funds. Texas Office of 
Public Utility Counsel v. FCC, 183 F.3d 393, 426-428 (5TH Cir., 1999), 
cert. denied sub nom; Celpage Inc. v. FCC, 530 U.S. 1210 2212 (2000). 
The Fifth Circuit held that USF funds are statutorily mandated special 
assessments supporting a federal program mandated by Congress. FCC has 
also requested that the Department of Justice recognize that USF are 
federal funds for purposes of representing FCC and the United States in 
litigation involving USF, such as the False Claims Act. 

[52] The Senate passed a "sense of the Senate" provision that stated, 
"Federal and State universal service contributions are administered by 
an independent nonfederal entity and are not deposited into the federal 
Treasury and therefore are not available for federal appropriations." 
See section 614, H.R. 2267, as passed by the Senate (Oct. 1, 1997). 
However, the purpose of that resolution was to respond to an attempt to 
withhold USF payments as a means to balance the federal budget or 
achieve budget savings. We understand section 614, H.R. 2267 intended 
to insulate USF from budgetary pressures and not to express a view on 
the proper fiscal treatment of USF. Our interpretation of USF as a 
permanent appropriation is consistent with the intent that USF is only 
available for universal service and could only be changed if Congress 
amended the law to permit USF to be used for other purposes. 

[53] 31 U.S.C.  1341, 1342 and 1517.

[54] Hopkins & Nutt, The Anti-Deficiency Act (Revised Statutes 3679) 
and Funding Federal Contracts: An Analysis, 80 Mil. L. Rev. 51, 56 
(1978). 

[55] Under FCC's rules, USAC is prohibited from making policy, 
interpreting unclear provisions of the statute or rules, or 
interpreting the intent of Congress. 47 C.F.R.  54.702(c). As 
addressed below, one of the issues that remains to be resolved is 
whether USAC is authorized to take the actions that obligate and 
disburse USF funds pursuant to FCC orders, rules, and directives or 
whether FCC must implement additional steps to ensure that obligations 
and disbursements are specifically authorized by FCC officials and 
employees.

[56] Revolving funds are funds authorized by law to be credited with 
collections and receipts from various sources that generally remain 
available for continuing operations of the revolving fund without 
further congressional action. See 72 Comp. Gen. 59 (1992).

[57] Legal liability for obligational accounting and to comply with the 
Antideficiency Act and the Recording Statute, 31 U.S.C.  1501 is 
distinct from accounting liabilities and projections booked in its 
proprietary accounting systems for financial statement purposes. For 
proprietary accounting purposes, a liability is probable and measurable 
future outflow or other sacrifice of resources as a result of past 
transactions or events. See B-300480, Apr. 9, 2003, and FASAB Statement 
of Federal Financial Accounting Standards Number 1.