Originally published 3rd Quarter 2004
On August 13, 2004, the FCC released new rules designed to curb waste, fraud and abuse in the E-rate program. The new rules, which will become effective 30 days after they are published in the Federal Register, affect both schools and service providers, and reflect the Commission’s increasing attention to the $2.2 billion annual E-rate program. The newly appointed FCC bureau chief who oversees the program, Jeffrey Carlisle, indicated recently that E-rate will be a primary focus for his bureau for the remainder of the year, so we can expect further actions by the FCC on the E-rate front in the near future. The following briefly summarizes the new rules adopted on August 13.
Fund Recovery
The Commission reaffirmed its policy that a school or service provider that has received funding in violation of E-rate rules must return the funds to USAC. The general rule is that if an erroneous amount has been disbursed, USAC will recover the difference between what the school or service provider is legitimately allowed under the rules and the total amount of funds disbursed to the school or the service provider. The FCC offered the following examples of situations in which funds must be recovered:
- Competitive bidding requirements: If the school signs a contract with a service provider before the end of the 28-day FCC Form 470 posting period, the full amount of funds disbursed must be recovered. In addition, if a school selects a service provider and price is not the primary factor in its selection over other bidders, then all funds must be recovered.
- Necessary resources: If it is determined that the school lacks the resources necessary to use the services obtained through E-rate, then all disbursed funding must be recovered. The school must have sufficient computer equipment, software, staff training, internal connections, maintenance and electrical capacity to make use of the E-rated services. The FCC did not explain how it or USAC will make determinations as to what resources are “necessary” in a given situation. It would seem that a “rule of reason” applies – for instance, it may not be reasonable for a small school to obtain three routers through the E-rate program if the school has only one computer lab. The best practice may be for the service provider and the school to agree in writing as to what resources are necessary for the school to have in place.
- Service substitution: Under rules adopted in December 2003, service change requests will be granted for a substitute service or product where:(1) the substitute service or product has the same functionality; (2) the substitution does not violate any contract provisions or state or local procurement laws; and (3) the substitution does not result in an increase in the percentage of ineligible services or functions. However, funding will be based on the lesser of the pre-discount price of the original service or the substitute service. Under the new rules, if the cost of the substituted service is less than the original funding request, USAC will recover the difference. If USAC determines that the substitute service is non-compliant with the three-part test above, it will recover the full amount of the funding request.
- Failure to pay non-discounted share: A school is obligated to pay, at minimum, 10 percent of supported services, depending on its eligibility discount. If the school fails to pay the non-E-rate portion owed for a particular funding request within 90 days after delivery of service, USAC may recover the E-rate funds disbursed for that funding request.
- Duplicative services: A duplicative service is one that provides the same functionality to the same population in the same location during the same period of time as another service provided with E-rate funding. In such a situation, USAC will recover the amount associated with the more expensive of the duplicative services. If there is evidence of fraud, USAC will recover the full amount of the duplicative services.
- Failure to complete service within the funding year: The failure to complete delivery of services by the relevant deadline in a given funding year is a rule violation. USAC will recover all funds disbursed for services installed or delivered after the close of the funding year. Of course, the parties are still free to seek an extension of time in which to install non-recurring services.
- Discount calculation violation: If a school miscalculates its discount rate, and the actual discount rate is lower than the rate submitted by the school, USAC will recover the difference of any funding disbursed. For example, if the school claims an 80 percent discount, but is in fact entitled only to a 60 percent discount based on the number of children eligible for the National School Lunch Program, then USAC will recover 20 percent of the disbursed funding. Service providers may wish to conduct their own due diligence to ensure that the school has correctly calculated its discount rate, particularly on large contracts.
- Service not provided for full funding year: If a school receives E-rate funding for a full year, and the service provider bills for the full year but only provides service for a portion of the year, USAC will pro-rate the service and recover the difference.
Recovery of De Minimis Amounts
The FCC recognizes that it is useless to try to recover funds when the administrative costs of doing so outweigh the amount to be recovered. Therefore, the FCC has asked USAC to provide it with information regarding the administrative costs involved in recovering improperly disbursed funds so that a de minimis amount can be determined. We expect that this amount will be announced in a subsequent FCC Public Notice.
Offsets Eliminated
Previously, the FCC permitted a service provider to offset an improperly disbursed amount by reducing the amount owed to the service provider from other existing E-rate commitments involving the same applicant. The FCC has now eliminated that practice. Apparently this system placed a significant administrative burden on USAC and was not cost-effective.
Document Retention Requirements
The Commission announced that all E-rate participants, including service providers, must retain relevant documentation for a period of five years. Specifically, applicants and service providers must retain all records related to the application for, and receipt and delivery of, discounted services for a period of five years after the last day service is delivered for a particular funding year. The rule applies to funding year 2004 and all subsequent funding years.
For illustrative purposes, the FCC offered the following list of common documents that must be retained. This list, which is not meant to be exhaustive, provides as follows:
- Pre-bidding process: Schools must retain a copy of their technology plan and the approval letter approving the technology plan. Copies of all consultant agreements must also be retained. Schools must retain copies of all FCC Forms submitted to the FCC, either electronically or on paper. This includes FCC Forms 470, 471, 472, 479, 486, 500, and Service Provider Invoice Number (SPIN) changes. Service providers should obtain and then retain copies of these forms submitted by the school, but only after it has been selected by the school and a contract has been signed and executed. Service providers should also retain copies of FCC Forms 473, 474, 498, as well as service check documents and SPIN changes.
- Bidding process: Schools must retain all documents used during the competitive bidding process. These include Requests for Proposal (RFPs), including evidence of the publication date; documents describing the bid evaluation criteria and weighing, as well as the bid evaluation worksheets; all written correspondence between the school and prospective bidders regarding the products and services sought; all bids submitted (both winning and losing); and any documents related to the selection of service provider(s).
Service providers must retain documents submitted to the schools, including a copy of the winning bid and any correspondence. Although it is not required, we also recommend that a service provider obtain copies of all documents required to be retained by the school or filed by the school with USAC, because in some cases the school fails to retain that documentation. If a service provider does not win a particular bid, it is not necessary to retain materials related to that bid.
- Signed contracts: It almost goes without saying, but schools and service providers must retain a copy of the contract, signed and dated by both parties. All amendments and addendums must also be retained, as well as any related agreements between the parties, such as up-front payment arrangements.
- Application process: Schools must retain all documents relied upon to submit the Form 471, including National School Lunch Program eligibility documentation supporting the discount percentage sought; documents to support the “necessary resources” certification, including budgets; documents used to prepare the Item 21 Description of Services attachment; and evidence of compliance with CIPA (the Children’s Internet Protection Act). Of course, a complete copy of the Form 471 and all other forms submitted to USAC (either electronically or on paper) should be retained by the school, and service providers should keep copies as well.
- Purchase and delivery of services: Schools and service providers must retain copies of purchase requisitions, purchase orders, packing slips, delivery and installation records showing where the equipment was delivered and installed or where the services were provided.
- Invoicing: All invoices must be retained by both the school and the service provider. For schools, this includes proof of payment, such as accounts payable records, service provider statements, school check, or automatic clearinghouse (ACH) transaction records; and BEAR forms and related correspondence. Service providers must retain similar records, including documents showing invoice payment by the school; USAC payment to the service provider; and evidence of payment of the BEAR check received from USAC, if applicable, including the date of payment. Service providers should also retain all billing records related to the provisioning of service to the school.
- Inventory: Schools must retain asset and inventory records of equipment purchased and components of supported internal connections services sufficient to verify the location of the equipment. Schools must also retain detailed records documenting any transfer of equipment within three years after purchase, including the reason for the transfer.
- Other documents: Although it is only briefly mentioned by the FCC, it is extraordinarily important for schools and service providers to keep copies of all correspondence with USAC, particularly all interactions with Program Integrity Assurance (PIA), selective review and invoicing review. All correspondence with PIA and USAC should be in writing (fax or e-mail, never by telephone). Also, to the extent that something is mailed to USAC, it should always be sent via certified mail or overnight delivery with tracking information.
Audits
The FCC will continue to subject schools and service providers to audits and investigations. Failure to comply with an audit or investigation is grounds for recovery of funds that were previously disbursed for the time period that is the subject of the audit or investigation.
The new rules will give USAC broader powers to conduct audits and, more importantly, to act on any findings of improperly disbursed funding. The FCC has directed USAC to submit, no later than 45 days after publication of the new rules in the Federal Register, a proposed plan for resolving audit findings. We expect that the FCC will subsequently issue a notice adopting the plan, either as proposed or perhaps with modifications. The FCC has also delegated authority to the bureau level to address audit findings and act on requests for waiver of FCC and USAC recovery rules. This delegation of authority may have the effect of increasing the number of audits initiated and acted upon.
Statute of Limitations
The Commission announced that all investigations and audits will be initiated and concluded within a five year period after final delivery of service for a specific funding year.
Technology Plans
If the school does not have an approved technology plan certified by a USAC-approved reviewer, then the school risks losing its E-rate funding when it files its FCC Form 486 certification. Because of this, service providers should ensure that the school has an approved technology plan once an agreement is executed, and it may be advisable to include a representation by the school that it has an approved technology plan in place. The technology plan must be in place and approved no later than the commencement of service. The FCC confirmed that technology plans are not necessary if the school is only applying for local and long distance telephone service or cellular service. If, on the other hand, the school is contracting for Internet access or internal connections, or for a combination of local, long distance or cellular services plus Internet access or internal connections, then an approved technology plan is required.
Other Requirements
FRN Use Required
All schools and service providers will be required to obtain and use an FCC Registration Number (FRN). This FRN is not to be confused with a “Funding Request Number,” which is the number used by USAC to specify individual E-rate funding requests. An FCC FRN, on the other hand, which is also known as a CORES number, is a ten-digit number that can be obtained electronically through the FCC’s Website, http://www.fcc.gov. Your FRN will be generated automatically, and you will need to create a password. You should retain copies of your FRN confirmation and password for your records.
Certifications
As a result of the rule changes. the FCC will be changing its E-rate forms to reflect new certifications that must be made by schools and service providers. Schools and service providers should review the new certifications carefully to ensure that they are in compliance and are not misrepresenting themselves to the FCC and USAC. For example, FCC Form 470 will be updated so that schools must certify that they will select the most cost-effective provider. Similarly, new Form 471 will require schools to certify that they selected the most cost-effective provider.
Finally, service providers must certify in a new Form 473 the following:
1. I certify that the prices in any offer that this service provider makes pursuant to the schools and libraries universal service support program have been arrived at independently, without, for the purpose of restricting competition, any consultation, communication, or agreement with any other offeror or competitor relating to (i) those prices, (ii) the intention to submit an offer, or (iii) the methods or factors used to calculate the prices offered;
2. I certify that the prices in any offer that this service provider makes pursuant to the schools and libraries universal service support program will not be knowingly disclosed by this service provider, directly or indirectly, to any other offeror or competitor before bid opening (in the case of a sealed bid solicitation) or contract award (in the case of a negotiated solicitation) unless otherwise required by law; and
3. I certify that no attempt will be made by this service provider to induce any other concern to submit or not to submit an offer for the purpose of restricting competition.
Conclusion
The E-rate program is undergoing many changes, and we expect further action from the FCC, and possibly Congress, concerning the program. Stay tuned – we will report on important future changes as they arise.
The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.