Fraud threatens Internet program for U.S. schools
By Marguerite Reardon
Staff Writer, CNET News.com
June 17, 2004, 4:00AM PT
The money was intended to fund the government's E-rate program, which was designed to help schools and libraries in poor and rural areas get affordable telecommunications and Internet services through subsidized discounts. The program, which began in 1998 as part of the 1996 Telecommunications Act, is overseen by the Federal Communications Commission and administered by the Universal Service Administrative Company, a private, nonprofit organization better known as USAC.
The program has achieved its main objective of wiring schools for access to the Internet but in the process has allowed fraud and waste to run rampant. About 40 fraud cases are being investigated by the FCC, the Department of Justice and the FBI.
"E-rate is the classic example of a program that was begun with good intentions and has found itself suffering from corruption, because there wasn't sufficient oversight," said Bob Williams, senior writer at The Center for Public Integrity, a nonprofit investigative research organization.
Moreover, any major telecommunications projects are destined to draw unusually rigorous scrutiny following the massive financial scandals of recent years involving such industry leaders as WorldCom, Nortel Networks and Enron. Those cases, which have culiminated in criminal charges against some top executives, have portrayed a culture of corruption in the telecommunications business unrivaled in any other sector of the technology industry.
As a result, the future of the 8-year-old E-rate program could be in jeopardy . Some members of Congress are already talking about revising the Telecom Act, and the House Committee on Energy and Commerce has scheduled a Thursday hearing to consider reforms in the program.
"The number of cases involving outright fraud have been few," said Sara Fitzgerald, vice president at consultancy Funds For Learning, who participated in a task force last summer that investigated fraud and waste in the E-rate program. "Most of the abuse happened in 1999 and 2000. Program administrators have gained more experience. Improvements still need to be made, but for the most part, participants want to follow the rules."
Still, those cases of abuse that have been uncovered are difficult to ignore. The largest scandal involving E-rate erupted in 2000, after officials discovered that Victor Fajardo-Velez, the former secretary of education for Puerto Rico, had mismanaged nearly $100 million in E-rate subsidies.
Funding fraud
Fajardo-Velez was eventually sentenced to three years in prison and fined $4 million for irregularities associated with the use of U.S. Education Department funds. The E-rate discounts allocated between 1998 and 2000 were supposed to be used to wire 1,500 of Puerto Rico's schools for the Internet. In 2001, only nine schools had been wired.
Puerto Rican officials have worked hard to rectify the situation. Cesar Rey-Hernandez, the new secretary of education, said Puerto Rico has been installing gear previously purchased with E-rate subsidies. By the end of August, he expects 1,000 schools to be connected to the Internet through satellite technology. The FCC seems confident about Puerto Rico's reforms and is allowing it to compete for E-rate funds in 2004.
"We are trying to go back to square one to build credibility and trust," Rey-Hernandez said. "I hope we get the support we need. You can't have real education without these technologies."
But Puerto Rico is only one jurisdiction that has been investigated for fraud. In May, a subsidiary of computer maker NEC pleaded guilty to wire fraud and antitrust violation involving its participation in the E-rate program. NEC Business Network Solutions, renamed NEC Unified Solutions, was accused of rigging bids and bribing officials in the San Francisco Unified School District and several other school districts around the country.
In Chicago, about $8 million worth of equipment provided by telecommunications carrier SBC Communications was never deployed in the city's public schools. One E-rate funding requirement is that equipment be purchased, delivered and installed in the same year that it is funded by the program.
Some cases stem from what investigators believe is the aggressive marketing of unnecessary equipment. In Atlanta, for example, officials say Cisco Systems and other companies led that city's public school system to purchase expensive equipment that it did not need.
Cisco denies any wrongdoing. "For the Atlanta Public School System, all Cisco networking equipment was sold to the integrators in accordance with their particular reseller agreement with Cisco. In all cases, the price of the equipment sold to the integrators was below the state's standard purchasing contract price," the company said in a statement.
Experts say the E-rate program in general was ripe for abuse from the beginning. In the early days, USAC had only one auditor to deal with roughly 35,000 applicants per year.
"At the early stages, we didn't have all the pieces in place to do robust audits," said Mel Blackwell, vice president of external communications at the administrating organization.
Universally better?
Blackwell and others insist that the situation has changed dramatically in recent years. USAC has hired more full-time auditors, investigators and lawyers, in addition to starting a whistle-blower hotline and planning to increase the number of site visits. The FCC's Office of the Inspector General has created an assistant general position and also hired more auditors to monitor the program.
It is difficult to estimate the average individual contribution toward the Universal Service Fund, because it is based on long-distance and wireless cell phone usage. But the median is probably about $1.04 per month, according to the Telecommunications Research & Action Center, a consumer advocacy group in Washington, D.C. Given that 90 percent of Americans have stationary or portable phones, the fund translates to about $2.5 billion every year.
"Ten years ago, most classrooms didn't even have phone lines, much less Internet connectivity," said Sam Simon, chairman of TRAC. "That?s changed, and I don't think the country would have gotten there without E-rate."
E-rate administrators say they have always tried to keep operational costs low. Only about 1 percent of the money collected through the fund is used for administration, Blackwell said.
But others say the effort to save costs may have unintentionally compromised oversight. Even though it would take away from money that could directly help schools and libraries, Tom Bennett, assistant inspector general for the Universal Services Fund, said more money needs to be spent on supervision.
"We still don't feel like we know what the level of fraud, waste and abuse is," he said.
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Without E-rate funding, they say, many schools and libraries would not have basic Internet service and other more advanced technologies in place. On average, the federal government only provides about 7 percent of overall funding for elementary and secondary schools. Poorer areas may receive more funding through block grants and federal programs such as Title I, but the bulk of funding comes from local and state governments.
Under the program, telecommunications companies or contractors provide equipment and services to schools and libraries at a discount. The difference comes from the E-rate fund. More than 30,000 schools and libraries apply for discounts every year. And about 90 percent receive some funding, according to program administrators.
A study published by the E-rate advocacy group Education and Library Networks Coalition last summer showed that many local governments have cut funding for technology to schools and libraries because of the poor economy. These municipalities are relying more on E-rate discounts to provide the basics.
Technology made possible through E-rate discounts has been instrumental in poor urban and rural areas, where unemployed people use the Internet in libraries to search for jobs or learn new skills, proponents argue. Schools in rural areas are using the program to provide distance learning for students and teachers.
In Arizona and New Mexico, E-rate discounts were used to buy equipment and services to provide advanced placement courses to students in areas with teacher shortages. In Maryland's Anne Arundel County Public Schools, many certification classes for teachers that were given at night are now being offered online.
Program supporters also note that E-rate funding has helped students and teachers at the Rochester School for the Deaf in New York use e-mail to communicate with each other and the hearing world. E-mail services have enabled parents of these children, who are often also deaf, to communicate with teachers and administrators.
Such projects encompass why E-rate proponents are so passionate in their defense of the program. Supporters are particularly worried that their concerns will fall victim to cost-cutting politics in this election year.
But at least one congressional staff member said it is too early to write off E-rate for good.
"There has been substantial discussion about dealing with macro telecommunication issues next year," said Larry Neal, spokesman for the House Committee on Energy and Commerce. "While E-rate could come up, changes to the program are not necessarily a logical consequence of these discussions."
FCC votes to revamp E-rate program
Inquiry of school Net funding deepens
Democrats counter Bush on tech
FCC: Nearly all schools connected to Net
The Economist
Congress presses for E-rate details
The Atlanta Journal-Constitution (registration required)
Fraud, waste mar plan to wire schools to Net
USA Today
Guilty plea in school grant fraud
The San Francisco Chronicle
New administration worries some E-rate proponents
The New York Times (registration required)
E-rate's enormous growing pains
Wired News
Fighting over the kids
Wired Magazine
Design: Ellen Ng
Production: Meghan McDowell
Who's to blame? Greedy companies. Now that I have stressed this let me stress the importance on this program.
Who of us want to pay in more taxes? No one. Which country has some of the best educational programs and yet compensates its teachers so poorly? This is the same country that is the most powerful, democratic and richest county in the world.
Erate program is just one of those programs that we as taxpayers fund, and it provides part of the funding for communications in our schools.
Teachers pay is another issue that must be addressed at the State and local level.
For our children to compete in the world that we hand to them in the future they are going to need to have the best tools and opportunities we can provide. Broadband in every home, school and library, a computer or device that will allow them free access to information and opportunities.
If we want to improve a program let's stay the course, focus on improving the program, toughen the criminal laws for abusers and give each American child the best education and resources we can.
Then and only then will we have a country that will continue what our forefathers dreamed about.
Douglas Campbell
There are unscrupulous people out for any money they can get from anywhere they can get it. I don't think Erate is the only victim. I also don't think doing away with Erate is the answer. Where would district come up with the funds to pay the telecom costs? We have a difficult time coming up with the funds to keep computers in the district and maintaining networks with the ongoing costs. If we are to educate our children for their future as productive workers and citizens, you can't cut the funding to support the necessary expenses to prepare them for a global economy and a global workplace.
What's worse is when I as an individual don't agree with the creation of another social service program operated with my taxes.
The premise of the USP was that service providers wouldn't offer service in rural areas without a subsidy. That's just typical liberal thinking.
And, I hate that politicians try to think for us poor folk by assuming that we wouldn't demand, and get, these services though the operation of the free marketplace.
Now we have a $2.5 Billion (that's with a "B" folks) program, cumulatively having spent over 10 Billion (that's with a "B" folks) with so much "pork" being divvied up among the players, they can't even spend it all.
Gimme a break!
Shift the responsibilty for the administration of Universal Service to the Dept of Education, or the FCC, someplace where required reporting and regulatory inspection would deter fraud and abuse.
- JAFT
- by mssoot June 21, 2006 3:08 PM PDT
- Its always the same just another f tax paid for all and never correctly utilized the way it should have been in the first place. In a tighter and tighter economy this BS looks more and more like the sh*t it really is.
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