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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.
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