Prepared Statement of The Honorable Joe Barton

Problems with the E-rate Program: Waste, Fraud, and Abuse Concerns in the Wiring of Our Nation's Schools to the Internet

Subcommittee on Oversight and Investigations
September 22, 2004

Good morning. Today, the Subcommittee continues its examination from its July hearing exactly two months ago. 

The hearing resumes with our focus on problems with the front-end of the E-rate process - that critical area of the program where applicants must take certain required steps to plan and choose the products and services they wish E-rate to support. Failure to take the right steps at the beginning of the process can result in wasteful spending, if not fraud and abuse, when E-rate funds begin to flow. 

The hearing also resumes the Subcommittee's examination of a bid-rigging conspiracy involving a large vendor, NEC-BNS, which affected E-rate applications in a number of school districts around the country. 

In late May this year, NEC pled guilty to conspiring to eliminate competition in E-rate projects and to wire fraud. This past July, we examined this conspiracy largely in connection with the San Francisco Unified School District. We heard about a fraudulent $50-million-dollar application that passed the normal approval process, but was eventually stopped because one key individual - the District's superintendent - took responsibility and turned down the questionable funding, and launched an investigation.

In that case, because of the superintendent's responsible actions, E-rate funds did not flow to the conspirators' hands. In contrast, today we will look at a couple of districts where the superintendents did not stop the questionable funding, where E-rate funds were expended. And we will examine how the school districts abdicated their duty to responsibly manage the peoples' money. 

Four of the witnesses in connection with this topic today declined to appear voluntarily. Therefore, we issued subpoenas last week to command their presence and testimony. Among them today are the Superintendent of Ecorse (Michigan) Public School District, Dr. Emma Epps, and the former facilities director for Ecorse, Dr. Douglas Benit.

Both of these school officials can help us understand how Ecorse became involved with NEC-BNS and how they developed plans to spend E-rate funds, including spending on goods and services that were ineligible for E-rate discounts.

We also have Mr. Quentin Lawson, executive director of the National Alliance of Black School Educators (NABSE). He can explain how NABSE assisted school districts with their E-rate plans, and how NEC-BNS became involved with these plans. 

We also issued a subpoena to Ms. Judy Green, an E-rate consultant and former employee of VNCI, a now defunct company that supplied E-rate gear to school districts through NEC-BNS. Although U.S. Marshals were not able to serve Ms. Green to command her appearance at our July hearing, she has been successfully served this time and we have provided her another opportunity to explain what she knows about the NEC-BNS conspiracy.

A well-run E-rate program requires a high degree of accountability on the part of applicants, vendor participants, and the managers of the program - both at the Universal Service Administrative Company (USAC) and the Federal Communications Commission (FCC). There are many key questions we must address on this front. 

For example, how do we ensure that school districts have done their homework, as the program requires, and have planned and decided what they need from E-rate before they choose vendors? How do we ensure the competitive bidding for goods and services has been conducted properly? How do we ensure that vendors, and consultants, do not insinuate their advice inappropriately in the process? 

To help us answer these questions further, another aspect of this hearing involves a case where about 20 school districts applied for a total of $500 million dollars in E-rate support, but were rejected for the funding by USAC, the E-rate administrator, because they did not select E-rate goods and services competitively. 

The year before this massive rejection, the El Paso Independent School District, the seventh largest school district in Texas, applied for and received E-rate discounts using the very same methods later identified by the FCC as undermining the competitive process. It is notable that El Paso E-rate support increased by some $64 million in a single year when it deployed this strategy to use a single vendor as a so-called strategic technology integrator for the purposes of E-rate work. 

El Paso's public request for this integrator made clear that the district had not yet determined what goods and services it would seek on E-rate applications, thus suggesting that the winning vendor would become closely involved in the subsequent E-rate planning process. 

The success of El Paso's funding requests appears to have influenced school-district decisions around the region the very next year. Those districts that decided to implement a strategy similar to El Paso's were later rejected because the strategy undermined competition. 

We will hear from the vendor that served El Paso as the integrator, IBM, about its role in this process today. We will also hear from a couple of the school districts and from some other witnesses who can shed light on how this process unfolded, and, I am hopeful, help explain how the public came to be so poorly served. 

What happened in El Paso and in the other districts will provide for this Subcommittee a window into the program set-up, the quality of planning by school districts, and the impacts on price and eligibility of services when competition isn't able to flourish. 

Throughout this review, I've remained troubled by the performance of the FCC and USAC at rooting out waste, fraud, and abuse. They are guardians of the public fisc, and they have failed to adequately discharge their oversight responsibilities. These case studies today will further illuminate problems we've found with their oversight of the program. The pace and scope of program reforms also have been too little too late. Finally, and more fundamentally, I have serious concerns about why the FCC set up the program this way, and from the evidence emerging from this series of hearings, this program needs wholesale restructuring. 

With that said, I look forward to hearing from USAC and the FCC, as well as the other witnesses this morning. I look forward to getting some clear answers, so that we can do our job to reform this program so that the public fisc is not squandered. 

Let me welcome panelists. And I now recognize the Ranking Member for the purposes of making an opening statement.

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