The $2.25 billion e-rate fund, which has helped thousands of schools and libraries get connected to the Internet, is riddled with fraud and financial abuse, according to a new report.
The report, released on Thursday by The Center for Public Integrity, is based largely on investigations by the Federal Communications Commission.
The e-rate, which is part of the Telecommunications Act of 1996, provides discounts as high as 90 percent on telecommunications and Internet services to schools and libraries.
The e-rate fund is paid for by imposed "universal service fees," which are essentially a tax on consumer telephone bills. Customers pay around 10 percent of their monthly phone bill to help support the program. Some companies charge higher rates, which go to the poorest schools.
Approximately 86 percent of the nation's public schools, 21 percent of private schools and 65 percent of libraries have received discounts since the program's inception, according to the report.
"There's no way that these schools and libraries would be wired to the Internet if it weren't for this program," said Bob Williams, who wrote the report.
But while the e-rate has connected thousands of schools and libraries that wouldn't have otherwise been able to afford these services, the program has also grown so much that deceitful contractors have squandered funds while other beneficiaries have made egregious accounting errors.
"It got so big and nobody was watching it all that well," Williams said.
Although the FCC oversees the e-rate, a nonprofit, the Universal Service Administrative Company, runs the program for the FCC.
But critics say that USAC, which is dominated by telecommunications companies that collect the fees, process applications and distribute the discounts, has allowed financial abuse to go unchecked.
"It seems that (USAC) hasn't done a great job of policing themselves," Williams said.
The extent of e-rate fraud and financial abuse is unknown, since the FCC has only two auditors to monitor the program.
"(The FCC) doesn't know how much fraud abuse is out there because they don't have the power and the people to find out," Williams said.
An October report (PDF) by the FCC Inspector General's office to Congress uncovered everything from bookkeeping errors to financial mismanagement for contracts worth hundreds of millions of dollars.
At least 26 cases of suspected e-rate abuse are currently under investigation by the FCC, according to eSchool News.
When the Inspector General's report was released "it was completely ignored," Williams said.
The FCC's investigation began when many of the e-rate's top beneficiaries, such as IBM (which received nearly $352 million in 2001), weren't following proper competitive bidding procedures. There is currently no evidence that IBM officials have engaged in any criminal misconduct.
Federal prosecutors filed the first criminal case involving the e-rate fund last month in New York, charging the owner and three employees of Connect2 Internet Networks with conspiring to defraud the e-rate program of millions of dollars.
The defendants allegedly offered free equipment and services to poor schools without charging schools the 10 percent cost of new equipment required by the program. Prosecutors say that the defendants convinced schools to install much more expensive equipment and services than they would have if they had to foot a portion of the bill.
"In this way, the defendants were able to sell almost limitless quantities of e-rate eligible goods and services to schools across the New York City area, with little or no control on the price they charged, and impose the entire cost on the government," the complaint states.
In another scheme, a piece of computer networking equipment with a purchase price of $20,000 was allegedly leased to an e-rate applicant for $20,000 per year.
Consumers who pay a portion of their monthly bill to help support the e-rate may be dismayed to find out where their fees are going.
"It's got to be a jolt to find out that, while most (money from telephone-bill fees) are going to schools and libraries, (these funds) might enrich folks who are playing loose and fast with the rules," Williams said.
E-rate fraud could also shortchange schools and libraries.
"There probably are some schools and libraries that didn't get funding who might have deserved it, because of this fraud."
Currently, there is no formal system for debarring unscrupulous service providers from the e-rate program. The FCC is studying new rules that would bar service providers and beneficiaries that are found to have committed fraud or financial mismanagement against the e-rate program.
Observers say that the FCC needs to hire more auditors to improve the e-rate program. The FCC Inspector General's report estimates that it would need an additional 15 auditors to provide adequate supervision.
"They need to do more than just lip service," Williams said. "They need to put proper resources to provide proper oversight."
But others say that the extent of fraud and abuse could be less widespread than the report suggests.
"Most participants obey the rules and put funds toward their intended use," said USAC spokesman Mel Blackwell. Most beneficiaries have made financial errors "because they made an honest mistake."
USAC has set up a whistle-blower hotline where callers can report tips about e-rate funding abuse. The hotline has averaged 100 tips per year over the past three years, Blackwell said.
"Where the recovery of funds has been necessary, we've done that," Blackwell said. "We're not sitting on our heels."
USAC is planning its own large-scale audit of approximately 100 beneficiaries. A broader, representative sample will more accurately convey the extent of financial abuse, Blackwell said.
"It's an understatement to say that there's not oversight on the program and there's not mechanisms in place to identify any waste or fraud," he added.
Supporters hope that fraudulent beneficiaries or service providers won't hinder the e-rate program.
"The e-rate program has dramatically reduced the cost of educational technology inputs," said Winston Himsworth, president of E-Rate Central, a consulting firm that prepares and processes e-rate applications.
That means better and broader use of technologies, which could bring more high-speed Internet connections into the classroom.
