Monday, December 1, 2008 - The Progress & Freedom Foundation Blog

The High Cost of USF Support

Friday is the day the government typically "puts out the trash." That is, releases bad news in the hope that it gets buried over the week-end. In that spirit, on the Wednesday before the long Thanksgiving Day weekend, a News Release was issued by the Federal Communications Commission announcing that the FCC's Office of Inspector General had released the preliminary results of its statistical analyses of audits of the Universal Service "High Cost" program. The OIG's report, entitled "The High Cost Program Initial Statistical Analysis of Data from the 2007/2008 Compliances Attestation Examinations," describes the results of audits examining disbursements from the FCC's Universal Service Fund High Cost program to HC program beneficiaries for a one year period, from July 2006-June 2007. The OIG report reveals deficiencies in High Cost program administration that rival the "Troubled Assets Relief Program" in its payment of dollars to program recipients without adequate oversight and controls in place to assure program goals are actually met. As a result, the costs to telephone subscribers of USF support for high-cost areas appear to be significantly increased by severe accounting weaknesses in the administration of the program.

By way of background, the FCC's High Cost program is designed to ensure that consumers in rural, insular, and high-cost areas have access to telecommunications services at rates that are "reasonably comparable to rates charged for similar services in urban areas." Pursuant to this statutory directive, the FCC created a program with five major support components for carriers in high-cost areas. All providers of telecommunications services pay into the program with assessments they have collected from their subscribers. The day-to-day administration of the USF is carried out by a third-party administrator, the Universal Service Administrative Company (USAC), under FCC oversight. Carriers seeking USF support under the HC program are required to provide certain documentation to USAC to ensure that the HC support is being distributed and used in conformance with the Communications Act and the FCC's rules.

The FCC News Release contains a suitably understated summary of the findings of the report:

The Communications Act of 1934 (the "Act"), as amended, requires the Commission to promote universal service by ensuring that consumers in all parts of the United States have access to affordable, quality telecommunications services. Section 254 of the Act directed the Commission, after consultation with the Federal-State Joint Board on Universal Service, to establish specific, predictable, and sufficient support mechanisms to preserve and advance universal service. Among other things, section 254 provides that consumers in rural, insular, and high-cost areas should have access to telecommunications services at rates that are "reasonably comparable to rates charged for similar services in urban areas." The audits were initiated to determine whether distributions from the Universal Service Fund, were being made in accordance with the Commission's directives and provide data for statistical estimates of erroneous payments as required by the Improper Payments Information Act of 2002 ("IPIA"). The audits were performed by commercial audit firms contracted and managed by USAC with FCC-OIG oversight. An "erroneous payment" is defined by the Office of Management and Budget under the IPIA to be "any payment that should not have been made or that was made in an incorrect amount under statutory, contractual, administrative, or other legally applicable requirements. Incorrect amounts are overpayments and underpayments (including inappropriate denial of payment or service). An improper payment includes any payment that was made to an ineligible recipient or for an ineligible service, duplicate payments, payments for services not received, and payments that are for the incorrect amount. In addition, when an agency's review is unable to discern whether a payment was proper as a result of insufficient or lack of documentation, this payment must also be considered an error." Under IPIA standards, a program is at risk if the erroneous payment rate exceeds 2.5 % and the amount of erroneous payments is greater than $10 million. The estimated erroneous payment rate for the High Cost Program ("HCP") was 23.3%. The previous estimate was 16.6%. Total estimated erroneous payments were $ 971.2 million as compared with the previous estimate of erroneous payments of $617.8 million. Accordingly, the FCC-OIG concluded that the High Cost Fund program is "at risk" under applicable IPIA criteria. (emphasis supplied)

"At risk" is a surely a euphemism for a program that loses in "erroneous payments" nearly one out of every four dollars collected from telephone subscribers. In 2007, pursuant to FCC rules, telephone consumers were effectively taxed over $4 billion for the high-cost portion of the USF. Thus, nearly $1 billion dollars of subscriber money went out the door in "erroneous payments."

As the report makes clear, erroneous payments include both over- and underpayments, and also instances where the agency is unable to discern whether a payment was proper as a result of "lack of documentation." The report's conclusions state that the "rate of improper overpayments is 22.8%, and the proportion of improper overpayments out of total improper payments is 98.2%." To be considered "erroneous," an payment "need not be the result of fraudulent misrepresentation, or a corrupt administrative process." "Nor does it necessarily exclude those factors as potential causes of erroneous payments." Significantly, nor are "the erroneous payments . . . necessarily recoverable from recipients by process of law." Fabulous. Not only has nearly $1 billion in erroneous overpayments gone missing, but even if final audits indicate where it has gone, it may not be recoverable!

Among the interesting results of this preliminary report are the identified causes of erroneous payments. According to Table 2 of the report, 50% of the causes of erroneous payments can be attributed nearly equally to two factors: either "Inadequate Documentation" (25.3%) or "Inadequate Auditee Processes and/or Policies and Procedures" (24.6%). Another 10% "Disregarded FCC Rule/s" and 12% had "Applicant/Auditee Weak Internal Controls." That is, roughly 75% of the erroneous overpayments can be attributed to poor bookkeeping, inadequate internal controls and "disregard" of FCC rules. This is stunning information. No wonder it made its appearance the day before Thanksgiving.

So, what are the take-a-ways? Although the report is preliminary, its authors state that the final results are unlikely to substantively change because of the auditor's internal standards and quality controls. Therefore it is certain that administration of the FCC's Universal Service Fund, already a grave problem, and one that is unquestionably the FCC's responsibility to fix, is growing significantly worse. The FCC's OIG report tells us at least two things of a programmatic nature. First, before policy makers consider expanding USF support to providers of broadband services, as has been recommended, the program's systems of disbursements must be completely overhauled. And, second, serious consideration should be given to removing oversight for the administration of the Universal Service Fund from the FCC and placing it a government department experienced in and capable of adequately supervising such a grant program.

President-Elect Obama has included deployment of a modern communications infrastructure as one of his Administration's technology policy goals.

Deploy Next-Generation Broadband: Barack Obama believes that America should lead the world in broadband penetration and Internet access. As a country, we have ensured that every American has access to telephone service and electricity, regardless of economic status, and Obama will do likewise for broadband Internet access. Obama and Biden believe we can get true broadband to every community in America through a combination of reform of the Universal Service Fund, better use of the nation's wireless spectrum, promotion of next-generation facilities, technologies and applications, and new tax and loan incentives. (emphasis added)

These are unarguably worthy goals. Let us hope that "reform of the Universal Service Fund" goes beyond solely reform of the program's objectives to include support of broadband Internet access services, and includes as a centerpiece top-to-bottom reform of USF internal processes, controls and oversight. Fixing the problems with High Cost program recipient controls and USF program oversight undoubtedly would free up vast amounts of funding that would be needed for any new initiatives that may be contemplated without further raising fees on telephone subscribers. In any event, the OIG report makes it painfully obvious that the first order of business for the High Cost program should be an extreme makeover to prevent further waste of telephone subscriber dollars.

posted by Barbara Esbin @ 10:05 AM | Universal Service