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Fraud and abuse is always a concern in large funding programs. E-rate is no exception. Although there have been few public reports of egregious actions, there are clear signs that the SLD and FCC have found problems and are actively investigating certain applicants and suppliers. At the very least, this scrutiny is leading to funding denials and/or funding delays.
In one state alone, we recently identified over 120 applications from last year (FY 2001) that have not yet been acted upon. We believe these applications are being held pending the resolution of supplier and/or applicant investigations. The majority of these applications involve small private and parochial schools with 90% discount rates - key targets for unscrupulous E-rate vendors.
SLD investigations appear to revolve around several questionable vendor practices which should act as red flags for all applicants. In particular:
(1) Close involvement by a vendor in all phases of the E-rate process, most particularly in the Form 470 service request and vendor selection phases is prohibited. Open competitive bidding is a key requirement of the E-rate program. A vendor cannot be listed as the contact on a Form 470 and should, in no way, act to prevent an applicant from receiving and considering other vendor bids.
(2) Applicants are responsible for paying the non-discounted portion of all E-rate eligible services. Even the poorest applicants must pay 10%. Vendor offers to provide essentially "free" service - by forgiving the non-discounted portion, arranging for "grants" to cover the non-discounted portion, or providing other offsetting free services - are at best suspect and at worst fraudulent.
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(3) Service and equipment pricing must be competitively based. SLD investigations are apparently finding purchase prices that are well above the prevailing market levels, annual lease rates that approach the purchase prices, and annual maintenance rates that far exceed the underlying equipment prices.
One suggestion for those seeking to avoid becoming embroiled in SLD investigations, by selecting and listing a suspect vendor on a Form 471 application, is to use the SLD's new Data Retrieval tool to identify vendors who seem to have been previously involved in a disproportionately high number of funding denials or delays. Although past funding problems do not necessarily indicate questionable practices, they do suggest situations that should be more carefully examined.
The SLD's Data Retrieval tool must be used on a state-by-state and on an individual funding year basis. (Since funding for FY 2002 is not yet complete, we suggest starting with FY 2001.) To check on a specific vendor, we recommend the following steps:
(1) In the Data Retrieval search screen, select funding year 2001, select the state in question, and enter the vendor's SPIN. Then click ">>Build Data File." (Instructions on using the Data Retrieval tool, and a link to the search screen, can be found on the SLD Web site at Open Data Search.)
(2) Download the resulting Data File following the instructions on the next screen (e.g., right-click for PC users). Import the Data File, which is a tab-delimited text file, into Excel (or another database program) for easier reading and data manipulation. Each row of the resulting file will provide data on one FRN associated with that vendor.
(3) To best focus on actual funding decisions, sort by service type and original discount rate, and delete all "NOT FUNDED" Internal Connection rows for discount rates below 86% (for which funding was not available in FY 2001). Deleting these FRNs avoids biasing the analysis by including any Priority Two funding requests that would not have been funded under any circumstances
(4) If the file contains a large number of records, it may be useful to sort the file by commitment status.
We recommend paying the most attention to unusually unsuccessful vendors (i.e., those involved with a large number and a large proportion of FRNs listed as "PENDING" or "NOT FUNDED"). So far in our analysis, for example, we have found a number of vendors, each associated with more than 100 FRNs for FY 2001, who did not have a single FRN funded last year. While lack of funding success is hardly proof of problematic E-rate practices, applicants considering using such vendors for their next year's applications may want to ask a few extra questions first.
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