THE SCHOOLS AND LIBRARIES FUND: FIVE MONTHS OLD AND FODDER FOR SCANDAL
FEDERALIST SOCIETY, Telecommunications & Electronic Media News, Fall 1998.
James V. DeLong

Under the Telecommunications Act of 1996, the FCC established a program to provide $2.25 billion dollars per year to subsidize discounts on telecommunications services to schools and libraries. Congress empowered the FCC to levy a charge on existing services, ultimately paid more or less directly by those renowned philanthropists -- the telecommunications ratepayers -- and to deposit the loot in a fund.

The FCC's rules entitled schools and libraries buy services from telecommunications providers at discounts of between 20 and 90 percent. The largest discounts go to institutions with the greatest percentage of children eligible for the school lunch program. The telecommunications company then gets reimbursed by the fund for the cost of the discount.

The program's stated purpose was to ensure that all schools and libraries, especially those in poorer areas, are able to access the Internet. At the time the 1996 Act was passed, Ameritech estimated that the total annual bill for conventional telecommunications services for all schools at only $650 million. An enormous increase in expenditures would be required for the schools to absorb $2.25 billion per year for Internet access. But American ingenuity is rising to the challenge.

First of all, the Telecommunications Act does not limit the program to Internet access. It sweeps in all telecommunications "services for educational purposes," which, as interpreted by the FCC, includes not only basic phone/fax service, but leased data lines, T-1 and ISDN lines, email, and wireless connections. This flexibility was considered important, for little is known about exactly which technologies, if any, are essential or useful in education.

Furthermore, the FCC did not want to discriminate between wireline and wireless services. The Act speaks only of subsidies for "services," which might lead one to believe that the discounts apply to schools' bills from their local and long-distance carriers, from ISPs, and so on -- but not to equipment such as computers or wiring. But "services" turns out to be a wonderfully flexible term, including "installation and maintenance of internal connections," which means eligible institutions can toss in "telecommunications wiring, routers, switches, hubs, network servers, networking software, wireless LANs, PBXs, and installation and basic maintenance charges." In short, the FCC morphed the program into a hardware-purchasing subsidy.

The FCC also takes a generous view of activities that would qualify as "education" eligible for discounts. For example, a school considering whether it could get funding for a T-1 line in the teachers' lounge would discover in the FAQ section of the SLC website the following:

"Q5. In a school building with instructional classrooms, there is also an auditorium and lounge area that are sometimes used as classrooms. Are the auditorium and lounge areas eligible for discounts? [Ans:] Yes."

The FAQ continues with qualifications about shared facilities and the distinctions between education and administration, but clearly the school will make the cut as long as it holds a class in the lounge every once in a while. The FCC does warn applicants that there are limits on "internal connections" eligible for subsidy, and payment will not be made for such items as personal computers, fax machines, asbestos removal, or electrical wiring.

But still the schools and libraries fund has grown with impressive speed. Currently, the fund is run by a non-profit corporation established by the FCC called the Schools and Libraries Corporation (SLC) (this is expected to change, as the General Accounting Office has announced that the FCC had no authority to create such corporate entity, and so Congress has directed the FCC to revisit this aspect of the fund's administration).

In November of 1997 the SLC sent out 41,000 packages of information to schools and libraries. In late January, SLC's website became operational, and it opened a 75-day window during which all applications received would be treated as filed at the same time and would be retroactive to January 1, 1998. By April 28, the SLC had collected 30,759 applications requesting $2.02 billion in subsidies for 1998, of which only $88 million is for Internet Access. A whopping $1.3 billion is for "internal connections," the category with the big hardware component; and $656 million is for "telecommunication & dedicated services" -- mostly conventional telephone and cable services.

On May 4, 1998, Senator John McCain, Chairman of the Senate Commerce Committee, and four of his colleagues, sent a letter to the Chairman of the FCC concerning "recently received reports concerning possible irregularities" with the schools and libraries fund. Some applicants reportedly told bidders who want to supply discount- eligible services that their bids will be considered only if they provide some ineligible items at "no cost." Among the items requested, the letter lists teacher training, security systems, 31-inch monitors, pay-cable services, carpeting, and painting. Furthermore, the schools were finding lawyers willing to opine that as long as the bidders state in writing that the cost of the "free" items is not inflating the price of the subsidy-eligible services, there is no problem with this linkage.

The letter also worried that some schools and libraries plan to use the discounts to "purchase systems with highly sophisticated computer and networking capabilities that are not designed for, and are not necessary for, student use in primary and secondary schools. Indeed, it is alleged that in some cases the equipment requested even exceeds that used by research institutions."

The FCC responded to McCain's letter with dozens of pages of reassurances that everyone is working hard to ensure that the rules are complied with and that recipients have prepared "technology plans" demonstrating that they can make good use of their subsidies. It attached some letters the SLC has sent to applicants directly addressing the problem raised by McCain -- inclusion of "free" ineligible services as a selection criteria. It asserted its faith in the school's obligation to pay part of the cost as a guarantor that the subsidized services are really needed. For example, a letter from the SLC to the Superintendent of Schools in the District of Columbia notes that an application to wire all 5,500 D.C. classrooms implies that the District is committing the resources to put equipment into each room, train teachers, buy software, upgrade the schools' electrical plant, and provide necessary maintenance. The letter also reminds the Superintendent that an applicant must certify that it has "secured access to all of the resources it needs to make effective use" of the discounted services, and that this certification is "made under penalty of civil and criminal enforcement."

Still, several of the FCC's letters raise concerns that the FCC's standards will prove utterly unenforceable. Several applicants are told that they may not look at the value of freebies in deciding whether to accept a bid. On the other hand, they may look at intangibles such as bidder experience and reliability. While this seems sensible enough, it allows schools substantial leeway to consider free ineligible items while flatly denying that they are doing this. And one need not assume venality to know this will happen. A school principal in a building with paint flaking into the milk in the school cafeteria, knowing that the universal service fund will pay millions for wire but not one cent for paint, will not feel guilty if she finds a way to pay a little extra for wire and get some paint in the bargain. The likely practical impact will be that freebies will become a standard part of the underground culture.

The $2.25 billion per year in the fund sets up another "Tragedy of the Commons." Everyone -- schools, libraries, carriers, and equipment suppliers -- must tap into the fund before it is exhausted by others. Every player in the system has incentives for inefficiency, mendacity, and downright fraud. Telecommunications carriers want to sell as many services to schools as they can so as to maximize their withdrawals from the fund. Providers of "internal connections" equipment want to peddle everything they can, for the same reason. Schools' incentives are distorted toward spending their money on high-tech rather than on such basics as teaching or books. SLC is relying heavily on "technology plans," largely approved by states, to police applications, but states are not going to want to bounce applications from their own schools and let the money go to other states. The game will be one of writing plans that give schools and libraries maximum flexibility while satisfying SLC and its successor. With 30,000 applications already submitted and perhaps double that expected in the future, the administrators are playing a losing hand.

The program also creates interesting incentives for the less reputable elements of the community. Making "internal connections" equipment eligible for discounts will put hundreds of millions of dollars of expensive, marketable, telecommunications equipment, sold at 90% off list price, into some of the toughest, most lawless places in the country. Anyone who lifts it is not even doing much damage to his own school. How much of the equipment does the FCC think will still be there a month after it is delivered?

Finally, the program creates interesting opportunities for federal prosecutors. This program, like all other federal grant programs, is administered under the shadow of hefty civil penalties and criminal sanctions. Even for schools determined to comply, the permutations of the rules and requirements are growing steadily more convoluted. School officials will learn, doctors have learned, that federal subsidies mean endless disputes over the meaning of regulations and over details of cost-accounting -- disputes that are converted from civil disputes into criminal cases. As the incentives set up by the schools and libraries fund push grantees to cross the thin line between serving their school's interests and outright fraud, prosecutors will find some new targets.

As Toffler has noted, the telecommunications revolution has accelerated the pace of the modern world. So perhaps it is only fitting that the schools and libraries fund has so swiftly grown from hype to promise to prosecutorial fodder.