Report Finds Fraud, Waste, and Abuse in Federal E-Rate Program

Published January 1, 2006

On October 18, 2005, the U.S. House Energy and Commerce Committee’s Oversight and Investigations Subcommittee approved a bipartisan staff report that exposed massive fraud, waste, and abuse in the nearly decade-old federal E-Rate program, designed to help schools and libraries acquire telecommunications and Internet services.

The report, “Waste, Fraud, and Abuse Concerns with the E-Rate Program”–which the subcommittee unanimously adopted–details the committee’s year-long investigation of the E-Rate program’s inner workings and its oversight by the Federal Communications Commission (FCC).

The E-Rate program was implemented as part of the Telecommunications Act of 1996. Signed by then-president Bill Clinton on February 8, 1996, it marked the first comprehensive revision of the nation’s telecommunications law in more than 60 years. It expanded the Universal Service Fund to help schools and libraries receive services from telecommunications companies at “affordable” rates.

The program is funded through telephone customers’ fees and capped at $2.25 billion annually. In order to implement the program, the FCC created a private nonprofit corporation known as the Universal Service Administrative Company (USAC). Within USAC, the Schools and Libraries Division (SLD) is responsible for the E-Rate program’s daily administration.

Undetected Fraud

Starting in June 2004, the House committee held a series of five hearings around the country examining different aspects of waste, fraud, and abuse in the program. According to the report, “while E-Rate has arguably benefited the nation’s children, the program falls far short as an example of efficiency, effectiveness, or integrity.” The report blamed all of the program’s participants–the FCC, USAC, schools, and vendors–saying “all have neglected their respective obligations and responsibilities under the program’s rules.”

Some of the report’s major findings include:

  • the FCC’s three key oversight mechanisms for the E-Rate program–rulemaking procedures, beneficiary audits, and reviews of the USAC decisions–are not sufficient to manage the program;
  • some school districts have acquired goods and services through the E-Rate program without using a formal bidding process, contrary to the program’s rules and local regulations;
  • there is no real protection from “gold-plating”–procuring technology goods and services far beyond reasonable school district needs and resources; and
  • weak competition requirements and inadequate oversight allowed a group of vendors to completely manipulate the competitive process for E-Rate program goods and services, without the USAC detecting the fraud.

One of the most egregious cases the committee uncovered involved Puerto Rico. From 1998 to 2001, the USAC disbursed $101.2 million in order to equip Puerto Rico’s 1,540 schools with high-speed Internet access. A later review found very few computers were actually connected to the Internet, and approximately $23 million worth of equipment was sitting in unopened boxes in a warehouse.

Stringent Reforms

“It is clear to me, as I consider the work laid out in the staff report, that many E-Rate program weaknesses must be addressed legislatively to avoid future waste and misuse,” said Rep. Ed Whitfield (R-KY), chairman of the Oversight and Investigations Subcommittee, in a news release. He indicated he would be working with members of the Telecommunications and the Internet Subcommittee to craft legislation to fundamentally reform the E-Rate program.

Some of the principles Whitfield believes should guide E-Rate program reform include:

  • more rigorous oversight by the FCC and USAC, including auditing of the program before the current federal legislative session ends so the FCC can provide Congress with a tangible measure of the extent of waste, fraud, and abuse;
  • concrete and achievable goals and measurers of effectiveness;
  • a mechanism to root out “gold-plating”;
  • the means to apply federal accountability requirements to E-Rate;
  • reduce the backlog of appeals, which can take years to resolve;
  • require school districts to take a greater financial stake in their E-Rate applications; and
  • implement a robust, transparent competitive bidding structure.

In response to growing concern, the FCC launched its own investigation into the oversight, administration, and management of the Universal Service Fund–which includes the E-Rate program–last June.

When asked to comment on the Congressional report’s findings that the E-Rate program is “a well intentioned program that nonetheless is extremely vulnerable to waste, fraud, and abuse, is poorly managed by the FCC, and completely lacks tangible measures of either effectiveness or impact,” FCC spokesman Mark Wigfield said in a news release, “FCC Chairman [Kevin] Martin was aware of concerns with the program, and one of his first initiatives was to open a proceeding considering fundamental structural reform to try to address those issues.”

Andrew T. LeFevre ([email protected]) is executive director of the REACH Alliance and REACH Foundation in Harrisburg, Pennsylvania.

For more information …

“Waste, Fraud, and Abuse Concerns with the E-Rate Program,” the October 18, 2005 report of the U.S. House Energy and Commerce Committee’s Oversight and Investigations Subcommittee, is available through PolicyBot™, The Heartland Institute’s free online research database. Point your Web browser to, click on the PolicyBot™ button, and search for document #18195.