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Witness Testimony
Mr. George McDonald
Problems with the E-rate Program: Waste, Fraud, and Abuse Concerns in the Wiring of Our Nation's Schools to the Internet 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 with you again about USAC and its administration of the Schools and Libraries Universal Service Support Mechanism, commonly referred to as the "E-rate" program. Overview I appeared before this Subcommittee on June 17, 2004, and my statement at that time provided an overview of USAC and its administration of the E-rate program. In the interest of time, I will not repeat that overview, but I would like to reiterate a few key points. Before we began making funding commitments in 1998, our internal controls were carefully reviewed by PricewaterhouseCoopers (PwC) and staff of the U.S. General Accounting Office (GAO). PwC provided an attest opinion about those procedures, and USAC implemented all of GAO's recommended changes. As we have gained experience, we have strengthened some procedures and added others to continue to protect the integrity of the program and the Universal Service Fund. An early enhancement was the establishment of the whistleblower hotline, which receives an average of 100 calls per year. Our Special Investigations Team investigates every call and ensures that appropriate follow up action is taken. Today we have an assortment of tools to help assure compliance with program rules. These include employing detailed application and invoice review procedures, denying funding commitments when appropriate, rejecting incorrect invoices, auditing program beneficiaries and service providers, recovering funds where rule violations are found, investigating whistleblower hotline complaints, supporting law enforcement investigations, and referring matters involving suspected program abuse to law enforcement authorities. But, as I indicated to you last month, it has become clear to us that we need another tool - a larger oversight presence in the field. We are now reviewing proposals we have received in response to a Request for Proposals (RFP) soliciting bids to conduct some 1,000 site visits a year. These visits will allow us to assess even more fully 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. Participation of the San Francisco Unified School District in the E-rate Program Let me now turn to the participation of the San Francisco Unified School District (SFUSD) in the E-rate program. SFUSD has received funding in each year of the program. We have disbursed approximately $6.4 million to various service providers for providing eligible products and services to SFUSD for the past six years. In regard to SFUSD's application for products and services to be provided by NEC Business Network Solutions, Inc. (NEC), which is the focus of this hearing, we committed approximately $48.6 million to SFUSD. SFUSD later cancelled those funding requests, and consequently, we never disbursed any of these funds. Mr. Chairman, I regret to report to you that I believe we made the wrong decision in response to this funding request and that we had information that should have provided a clear warning to us. My review of the file indicates that we had reason to question whether one of the pieces of documentation that SFUSD provided to us - its budget - had been improperly altered when it was submitted to us. We should have done more to assure ourselves that the budget SFUSD provided to us was accurate, but we did not. If we had, in light of what we have learned since, I believe we would have denied this funding request. We requested SFUSD's budget and other documentation as part of our review of whether SFUSD had the funds to pay the non-discount portion of the cost of eligible services and had acquired the goods and services not eligible for discount but necessary to make effective use of these services, such as computers and software. This particular review has been part of our application review procedures since the first year of the program, and we have strengthened this review every year. For example, in the year in which we reviewed this particular application, our reviewers' notes were not entered into our computer system, and our reviewers brought novel issues to the attention of their supervisors orally. In this case, the issue of whether SFUSD's budget was accurate was a novel issue, and so the reviewer would have communicated the concerns orally. Today, reviewers note their observations in our computer system, and novel issues such as SFUSD's budget must be communicated in writing and are required to be addressed. The decision regarding the novel issue must be documented before a final decision is made with respect to the application. Beyond these changes, we have established an additional layer of review through our quality assurance function to review the work of our application reviewers, which further safeguards program funds. Since August of 2001, we have provided support to the law enforcement investigation of NEC in the form of documentation, answering numerous questions about the program in general and this application in particular, and meeting with law enforcement officials. As we provided this support, we coordinated closely with the Federal Communications Commission Office of Inspector General, and through that process, strengthened our joint efforts to protect the fund from waste, fraud and abuse by supporting law enforcement investigations of those who would take advantage of the program. As a result of our support of this investigation, we learned that SFUSD officials and NEC had provided us with false information in response to our many questions about this application. Conclusion Mr. Chairman, thank you for providing me with the opportunity to address the Subcommittee. I would be happy to respond to any questions you may have. |
