Witness Testimony

Good morning, Mr. Chairman and Members of the Subcommittee. My name is George McDonald. I am the Vice President of the Universal Service Administrative Company ("USAC") responsible for the Schools and Libraries Division. It is my privilege to be here today to speak to you about USAC and its administration of the Schools and Libraries Universal Service Support Mechanism, commonly referred to as the "E-rate" program.

Overview

USAC is the not-for-profit corporation designated by the Federal Communications Commission ("FCC") to administer the E-rate program based on the Telecommunications Act of 1996 and FCC regulations adopted pursuant to the Act. In order to accomplish our mission, we work closely with the FCC, consulting almost daily on issues of implementation.

We are committed to helping prevent waste, fraud, and abuse in the universal service support mechanisms, and we devote substantial resources towards that goal so that the benefits of the discounts go only to eligible recipients for eligible uses. I would like to describe some of the administrative procedures we use to help ensure program integrity. I will also outline a new initiative designed to further improve compliance with program rules. Finally, I will briefly describe USAC's activities concerning the Puerto Rico Department of Education's participation in the E-rate program.

Before we began making funding commitments in 1998, we hired an independent consultant, Coopers and Lybrand - which later became PricewaterhouseCoopers - to advise us on our internal controls and attest to the adequacy of those controls. Our internal controls are designed to ensure that commitment and disbursement of E-rate funds are consistent with FCC rules relating, for example, to the eligibility of entities, of services, and appropriate discount rates. At the request of Senator McCain, staff of the U.S. General Accounting Office reviewed our draft procedures and recommended changes, which we implemented. For example, we moved a procedure to scrutinize the resources applicants have to use the discounted services from after commitment of funds to before.

We employ many tools to help assure compliance with program rules. These include detailed application and invoice review procedures, denials of funding commitments when appropriate, rejection of incorrect invoices, audits of program beneficiaries and service providers, recovery of funds where rule violations are found, investigations of whistleblower hotline complaints, support to law enforcement investigations, and referral of matters involving suspected program abuse to law enforcement authorities.

USAC's application and invoicing review procedures have greatly evolved over the past six years, becoming more detailed and comprehensive, as we have gained experience with the program. For example, as we saw instances of service providers not making applicants pay the nondiscount share (a key rule of the program), we initiated verification of payment of that share into our invoice review process. USAC's internal controls have prevented the unlawful disbursement of hundreds of millions of dollars, either as a result of denials based on failure to comply with program rules or cancellation of funding requests by the applicant as a result of USAC inquiries.

Application and Invoice Volumes

We receive approximately 35,000 E-rate applications per year. In addition, we process an average 80,000 individual requests for payment annually. Our fundamental responsibility is to make well-founded decisions to approve or deny these requests. Each of these documents is individually processed using detailed Program Integrity Assurance, or PIA, review procedures to arrive at an appropriate decision consistent with program rules.

Audits

We also conduct audits of beneficiaries to assess applicant program compliance. As a result of audit findings, we have modified and strengthened our internal controls, improved our outreach, and better educated applicants and service providers regarding program rules.

Whistleblower Hotline and Special Investigations Team

In order to provide the public with a means of reporting activities that may be in violation of E-rate program rules, USAC maintains a whistleblower hotline. USAC's Special Investigations Team investigates every call to determine if further action is required. We receive and follow up on over 100 calls per year.

Education Regarding Program Requirements

Comprehensive applicant and service provider training in program requirements are vital components of program integrity. USAC's applicant training - an annual conference of state E-rate coordinators and regional meetings throughout the year - emphasize the importance of compliance with program rules and the consequences of non-compliance. USAC also provides training and education opportunities to service provider participants in the program

New Site Visit Initiative

One of the key lessons we have learned from our experience in administering the program and from the audits we have conducted, as well as from law enforcement investigations and media reports, is that USAC needs a larger oversight presence in the field. Site visits will allow us to assess more fully, in real-time, how E-rate funds are being used, to learn about and publicize best practices in education technology and program compliance, and to help ensure that products and services have in fact been delivered and are being used effectively. We have issued a Request for Proposals soliciting bids to conduct some 1,000 site visits a year. This step will further enhance program integrity.

Puerto Rico Department of Education

Finally, let me turn to the participation of the Puerto Rico Department of Education ("PRDOE") in the E-rate program. For the first three funding years of the program, 1998-2000, PRDOE applied for and received a substantial amount of funding from USAC. As a part of our initial set of audits of beneficiaries in 2000, we selected PRDOE for an audit of the first funding year. The audit was completed in October 2001. We were particularly concerned about findings that 100,000 computers that were to be installed in classrooms had not by then been purchased and installed and that there were no computers in the two schools the auditors had visited. So we advised PRDOE in December 2001 that we would make no further commitments or disbursements of E-rate funds until we received and evaluated its response to our inquiries concerning the availability of computers and other resources required to make effective use of the discounted services. Since that time, USAC and the FCC have worked with PRDOE as it has sought to come into compliance with program rules. In November 2003, the FCC issued an order directing USAC to conduct an audit of PRDOE prior to disbursing any additional E-rate funds. That audit has begun.

Conclusion

Mr. Chairman, thank you for providing me with the opportunity to address the Subcommittee. We look forward to continuing to work with Congress to improve the Schools and Libraries Support Mechanism. I would be happy to respond to any questions you may have.