News of the Week

Funding Status

The application window for FY 2011 opened on Tuesday, January 11, 2011, and will close at 11:59 p.m. EDT on Thursday, March 24, 2011. The last possible date to file a valid Form 470 for FY 2011 is February 24, 2011. (Note: The required 28-day posting period for a Form 470 filed on February 24th would end March 24th, the last day of the filing window. Please do not wait this long.)

With one quarter to go, there is $400 million in previously unused funds available to be rolled over into FY 2011. Last year, at this time, the interim total was $500 million (including $100 million that had been held in reserve from FY 2009). Assuming that the current quarter generates another $200-300 million in unused funding, which would be aggressive, the total available roll-over amount for FY 2011 would be $600-700 million. Based on recent experience summarized below, this may not be enough to support a Priority 2 funding threshold much below 90%.

Wave 37 for FY 2010 will be released on Tuesday, February 8th, for $53.4 million. This will raise cumulative funding for FY 2010 to $2.21 billion. Currently, Priority 2 funding is being awarded at 81% and above, and denied at 79% and below. A recommendation to deny funding at 80% and below is pending before the FCC.

Wave 80 for FY 2009 will be released on Wednesday, February 9th, for $9.57 million. Cumulative funding for FY 2009 is $2.80 billion.

Basic Maintenance: Beyond SMARTnet

On January 27th, as discussed in last week's newsletter, the SLD released a Special Edition News Brief designed to clarify the new rules on basic maintenance. More specifically, the News Brief focused on Cisco's SMARTnet, now deemed ineligible, and on Cisco's new E-rate eligible maintenance products. USAC appears to be somewhat sensitive about having focused on one supplier's approach to the new rules, and it is taking pains to note that Cisco was discussed only because so many specific questions had arisen about SMARTnet.

There are several basic principles that must be understood with regard to the new maintenance rules, and one fine point that could be extremely problematic for unwary applicants and service providers. The principles are:

1. An unbundled warranty is ineligible. By this, the FCC means any agreement under which an applicant must pay to cover equipment maintenance, regardless of whether any actual work is performed. The term "warranty" is a bit misleading. The principle applies, not only to a traditional warranty on a specific piece of equipment, but to any maintenance contract for E-rate equipment. The following is an example of maintenance contract language that is completely inappropriate for E-rate purposes:
   
   "Payment is made on an annual basis at the start of each year for the term of the agreement. Unused hours at the end of the agreement term will be forfeited."
2. A bundled warranty – "bundled" in the sense that it is included with an equipment purchase at no additional cost – is not affected by the new rules. An applicant is not required to cost-allocate out the implied warranty cost in an eligible equipment purchase.
3. Two categories of basic maintenance are eligible, but are treated differently for E-rate invoicing purposes. In particular:
   1. Ongoing maintenance (e.g., software patches and certain technical support) can be provided at a fixed annual price, and can be invoiced anytime during the year.
   2. Break/fix maintenance is eligible only to the extent that it is actually performed. As an E-rate funding matter, this means that an applicant must estimate an annual amount when applying for E-rate, but that SPI or BEAR invoices will be paid only as the work is performed.

The fine point deals with the difference between E-rate eligible and ineligible products, and eligible and ineligible maintenance services. If a contract covers basic maintenance of both eligible and ineligible products (or products that are partially eligible), the applicant's funding request must be cost-allocated. In general, if USAC disagrees with the cost-allocation, the funding request amount must be recalculated, but is not otherwise in jeopardy.

However, if a contract covers more than eligible basic maintenance, the situation becomes more complex. The FCC's Third Report and Order (FCC 03-323), issued in 2003, indicates that if a contract includes both basic maintenance and non-basic maintenance (e.g., network monitoring), then the entire contract is ineligible. Presumably, this is why the SLD's News Brief indicates that SMARTnet, per se, is ineligible. SMARTnet is a fixed price product including both an eligible ongoing maintenance component and an ineligible insurance-type break/fix component. Hence the entire contract is ineligible.

Or is it? The FCC recently issued a clarification on basic maintenance (DA 10-2355) that indicated that fixed price basic maintenance contracts would "...continue to be eligible for funding, but only for work that is actually performed under the contract." One interpretation of this statement is that the insurance-type break/fix component of basic maintenance can be included in an otherwise eligible contract, but that discounts will only be provided for work actually done.

Confusing isn't it? It is not clear whether the inclusion of a form of an ineligible unbundled warranty in a basic maintenance contract makes the entire contract ineligible, or whether discounts on that aspect of the contract will be limited, during the invoice processing stage, to work done. We are expecting further action from the FCC to clarify this conundrum, perhaps even reversing the troubling provision of the Third Report and Order. But it is not clear that this clarification will come in time to resolve FY 2011 application filing problems.

To avoid these problems altogether, Cisco created two new products – an eligible ongoing maintenance service called CiscoBase, billable at a fixed annual rate, and an eligible break/fix service, billed on a time and materials basis. The good news for Cisco is that its E-rate solution has apparently been vetted – and in a sense endorsed – by USAC. Other equipment manufacturers and maintenance providers have no such advantage. They, and their E-rate customers, must come up with their own solutions to the rule change.

Applicants applying for basic maintenance funding of any sort for FY 2011 must act on this rule change - and act right now. There is less than two months to go before the application window closes, and some changes may require new Form 470s. Here are a few practical problems and suggestions to consider:

1. Existing contracts may have to be modified. Hopefully, from a procurement standpoint, these changes can be considered minor modifications. If not, they will need to be quickly rebid, with new Form 470s.
2. If a maintenance contract involves both ongoing and break/fix services, it may be advantageous to split it into two separate contracts and/or into separate FRNs for filing purposes. The rules do not require such a split, but USAC has indicated that it may facilitate invoicing. More importantly, it provides some protection from having an entire single contract rejected.
3. According to the SLD's News Brief, Form 470s filed requesting specific products such as SMARTnet, must be re-filed to describe the required functionality.
4. The time and materials component requires an estimate of annual use. As with any variable cost service, you need to request enough funding to cover normal contingencies. USAC has not indicated how it will review maintenance estimates, noting only that they should be based on such factors as past experience and the age and cost of the equipment serviced. Service providers, once selected as vendors, may be able to provide supporting documentation.
5. E-rate funding is increasingly being reviewed by USAC twice - once before funding is awarded during PIA review, and again during the invoicing process. Invoicing review is likely to be particularly important for break/fix maintenance. Applicants and/or service providers should be prepared by carefully documenting time and material expenses.

Schools and Libraries News Brief dated February 4 - Review of the Form 470 Process

The SLD's February 4th News Brief reviews various aspects of the Form 470 procurement process. The topics covered include:

1. What must, and must not, be in a Form 470.
2. Issuing an RFP and coordinating it with a Form 470.
3. The 28-day posting requirement.
4. Form 470 requirements in respect to multi-year contracts.
5. Correcting a posted Form 470 using the Form 470 Receipt Notification Letter.
6. Posting in the wrong category of service.

With little more than two weeks left to file Form 470s for FY 2011, this News Brief is critical reading for applicants who have not yet filed. It is also recommended reading for those who have filed, who may find that they made a mistake, and who will have to quickly re-file.