TechBriefing: E-Rate Subsidies for Schools and Libraries

Summary

Since 1998, the Universal Service Fund’s E-Rate program has funded telecommunications and broadband connections for schools and libraries around the United States. There is bipartisan agreement that the program needs to move towards funding next-generation technologies and focus on giving students access to broadband, but there isn’t a consensus on how to get there. The Senate Commerce Committee held a hearing on E-Rate reform on July 17, 2013. On July 19, the Federal Communications Commission will hold an Open Meeting at which the FCC will introduce a Notice of Proposed Rulemaking on E-Rate, the first administrative step towards crafting a new framework for the program.

Recommendations

The FCC should:

Adjust the E-Rate program so that it no longer funds traditional landline telephone service or other obsolete technologies, and instead focuses on connecting students to the Internet via broadband connections.
Simplify E-Rate’s complex application process, which increases costs on schools and libraries and skews the distribution of benefits.
Require E-Rate recipients to publicly report exactly how they are using their funding so taxpayers and the Commission can curb waste, fraud and abuse in the program.
Ensure that funding goes to the schools and libraries who need it most, instead of those who can afford to game the system.

Background

What is E-Rate?

The Schools and Libraries Program, colloquially known as “E-Rate,” is the portion of the Universal Service Program that funds connecting schools and libraries to telecommunications services and the Internet. The program was enacted as part of the 1996 Telecommunications Act and went into effect in 1998.

Schools and libraries receive telecommunications and Internet access services, known as Priority One services, at a discounted rate. They also receive discounts for “internal connections,” known as Priority Two services, including the physical wires, modems, firewalls, servers, software and other such components that connect classrooms to the Internet (but not computers themselves).
When first implemented, E-Rate had an annual funding cap of $2.25 billion. Since 2010, the cap has been adjusted for inflation, to $2.38 billion — just over $40 per student.
Roughly 90% of the funding goes to schools; 10% to libraries.
If accepted — after a complicated and expensive process — schools and libraries can receive discounts on communications services of between 20% and 90%, depending on the percentage of students eligible for the National School Lunch Program in the school (or in the school district where the library is located).
All accepted requests for Priority One services are fulfilled before any Priority Two (connectivity software and hardware) funds are dispersed. Priority Two services are then funded until the annual cap has been exhausted. Typically only about 20% of requests for Priority Two services have been funded, meaning millions of dollars in requests for “internal connections” are denied every year.
Telecommunications and Internet providers are incentivized to participate in the program because the discounts given to schools and libraries are deducted from their required Universal Service Fund contributions — essentially functioning like a tax credit.

Discussion

What are the problems with the current E-Rate program?

Priorities : E-Rate still prioritizes traditional telephone services, even paging, ahead of broadband connectivity for classrooms. The fact that Priority Two services are fulfilled after Priority One funds are dispersed means that 80% of requests for actually bringing broadband into classrooms are denied.
Complexity : The E-Rate application process is incredibly complicated and difficult to navigate. School districts routinely hire expensive outside consultants to navigate the process or risk having their applications denied. There is a decade-long backlog of appeals for denied applications.
Red tape: It often takes up to three years for schools and libraries to receive E-Rate funding. Each year, $400 million in allocated funds are never actually dispersed due to delays and administrative missteps.
Accountability: There is currently no mechanism to monitor how schools and libraries use their funding.
Uncertainty : E-Rate funding is disbursed on a year-to-year basis, which makes it difficult for administrators to plan for their own school’s needs.
Perverse incentives : Schools that receive larger discounts have little incentive to spend their dollars efficiently. For example, a school receiving a 90% discount only pays $1 for each $9 it receives from the E-Rate program. This disparity has historically led to schools with a 90% discount requesting about twice as much from E-Rate as schools receiving up to a 79% discount. When schools have little skin in the game, they are prone to request much more than they need and spend it carelessly.
For example, a service provider in New York billed the program $81,600 for Internet access expansion in a Brooklyn school where students are not even allowed to use the Internet.

What reforms have been proposed?

Republicans and Democrats alike have acknowledged that the E-Rate program needs to be reformed, but disagree on what an E-Rate 2.0 should look like. President Obama has outlined his ConnectED program which creates broad new goals for E-Rate, such as:

Ensuring 99% of students have broadband access in schools and libraries within five years;
Upgrading broadband speeds to ensure that all schools and libraries have 100 Mbps connections;
Training teachers how to incorporate new technology into their lessons; and
Providing students with next-generation educational devices such as digital textbooks.

FCC Commissioner Jessica Rosenworcel has proposed reforms consistent with President Obama’s ConnectED program, which would:

Increase E-Rate funding to meet increased demand.
E-Rate funding will be increased through reallocating other Universal Service Fund spending to E-Rate and eliminating waste, fraud, and abuse in the program. No additional government spending will be necessary.

Provide every school with access to 100 Megabits per 1000 students by 2015; by 2020, every school should have access to 1 Gigabit per 1000 students. Encourage and institute new and creative public-private partnerships. Simplify the process for applicants: Because the current E-Rate system might be deterring small and rural schools from applying for funding, Commissioner Rosenworcel suggested multi-year applications as a means of reducing paperwork and administrative expenses for applicants.

Commissioner Ajit Pai has proposed a more substantial restructuring of the program:

Simplified application process : Applicants would complete only two short forms — a one-page application and a report on how they used the money. A USF employee will perform all the necessary calculations. Consultants will no longer be necessary.
Responsible funding : The E-Rate budget would be divided on a per-student basis, with more funding allocated per-student in rural or low-income areas. Schools would receive funding based on the number of students who attend, meaning that funds will now follow students, instead of the sliding scale used today (based on the percentage of students eligible for the National School Lunch program). To ensure that all schools have an incentive to use their funding efficiently, they must contribute $1 for every $3 they receive, whereas some schools currently pay only $1 for every $9 in E-Rate funding.
Next-generation technologies : The distinction between Priority One and Priority Two services would be eliminated. That would allow schools and libraries to use E-Rate funding on communications services and hardware as they see fit, provided they are used for educational purposes. The program would no longer fund stand-alone phone service, because the focus of the E-Rate program should be connecting students to the Internet and not funding phone service for administrators.
Transparency and accountability : School administrators would certify that all E-Rate funds are being used to help students learn , not running phone lines to garages, providing Internet access for football field houses, or paying teachers’ cell phone bills. The USF administrator would maintain a website where parents, teachers, and the public can examine exactly how each school is using its E-Rate funding.
Fiscal responsibility : The plan would generate $1 billion for broadband connections without increasing the E-Rate budget by eliminating landline telephones and other obsolete technologies from the program’s eligible services and reducing by 75% the amount of funding left unspent each year due to administrative oversights.

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