Funding Status
FY 2011:
The application window for FY 2011 is scheduled to close at 11:59 p.m. EDT on Thursday, March 24, 2011. Since Form 470s must be posted for 28 days, the last possible date to file a valid Form 470 for FY 2011 is Thursday, February 24, 2011. We strongly advise applicants to file as soon as possible so as to provide adequate time, after waiting the required 28 days, to select vendors, sign contracts, and file Form 471s.
This year, more than any year in the past, applicants should do all in their power to avoid last minute filings of Form 471s (and, by extension, late filed Form 470s). Major modifications are being made this year to the SLD's online filing system to accommodate the new versions of the Form 470 and Form 471. Applicants continue to report software bugs in the system. The SLD is continually working to correct these problems, but software patches have an annoying tendency to create new bugs. You do not want to have to rely on a problem-free filing on March 24th.
FY 2010:
Wave 39 for FY 2010 will be released on Tuesday, February 22nd, for $39.8 million. This will raise cumulative funding for FY 2010 to $2.28 billion.
Priority 2 funding is currently being awarded at 81% and above, and denied at 79% and below. The SLD has a recommendation pending before the FCC to deny funding at 80% and below. This would be a major disappointment in a year in which $920 million in additional funds from a large roll-over and a small positive inflation adjustment was added to the original $2.25 billion. This is a strong indication that Priority 2 funding in future years is unlikely to reach 80%.
On February 11th, the consulting firm, Funds for Learning, filed a petition with the FCC arguing that a decision to cut-off Priority 2 funding at 81% now is premature. Last year, the final Priority 2 cut-off was not made until mid-August. Even that, we believed, should have been delayed in the not unreasonable hope that a number of applicants would file Form 500s to reduce funding deemed unneeded during the post-funding year invoicing period.
FY 2009:
Wave 81 for FY 2009 will be released on Wednesday, February 23rd, for $3.7 million. Cumulative funding for FY 2009 is $2.79 billion.
Further Guidance on Basic Maintenance
The SLD's February 18th News Brief contains some much needed relief — albeit not enough — on basic maintenance. The News Brief and this article should be read carefully by applicants applying for, and vendors providing, E-rate maintenance services. Otherwise, unless you take perverse pleasure in the complexity of E-rate, you might want to skip this article.
Brief History:
In late 2003, the FCC released its Third Report & Order ("3rd R&O") (FCC 03-323). With regard to maintenance, the 3rd R&O did the following:
- It created a second Priority 2 category to separate Basic Maintenance of Internal Connections, a recurring service, from Internal Connections, a non-recurring (purchase/installation type) service of E-rate eligible equipment.
- It clarified that eligible maintenance had to be "basic" break-fix type service, not upgrades, monitoring, etc.
- To focus attention on the "basic" aspects of eligible maintenance, it took the somewhat draconian step of making any maintenance contract completely ineligible if it included anything but basic maintenance. Applicants were permitted to allocate basic maintenance between eligible and ineligible equipment served, but they were not permitted to allocate between basic and non-basic maintenance services.
In the FCC's Sixth Report & Order ("6th R&O") (FCC 10-175), released last September, the FCC ruled that "unbundled warranties" were ineligible. By this the FCC meant that it would not provide discounts on equipment warranties, or any type of maintenance contract, under which applicants were required to pay regardless of whether or not any actual work was performed.
Unfortunately, many warranties and maintenance contracts cover ongoing real work plus an insurance-like allowance for work needed if equipment actually breaks. Under the 6th R&O, such warranties would thus include both eligible and ineligible components. But under the 3rd R&O, a single contract including both would presumably be fully ineligible.
The poster child for this dilemma was Cisco SMARTnet. These warranties included both ongoing support for software fixes and technical assistance, plus an equipment warranty for labor and replacements. On the basis of the 3rd R&O, SMARTnet was deemed ineligible.
Last December, the FCC issued a clarifying order (DA 10-2355) stating that fixed-priced contracts were allowable, but that E-rate discounts would be provided only for work performed. The FCC recognized that some of this work was ongoing, and indicated that the cost for those components could be discounted on a fixed annual basis. But discounts on break-fix type work would be paid only when and if work was performed.
Cisco's response was to replace SMARTnet for E-rate applicants with two maintenance products: (a) an ongoing service contract called CiscoBase; and (b) a separate Cisco time and materials contract. Other equipment manufacturers and maintenance providers have been working towards similar two-prong maintenance agreements.
But there are two problems. The first is that there is very little time left in the FY 2011 application cycle to create entirely new maintenance agreements. And there is a fear, based on the 3rd R&O, that any agreement not fully passing USAC muster would be considered fully ineligible. The second problem is that many arrangements are covered by existing contracts either with individual applicants or with state master contracts. The root of both problems is the inflexibility of the 3rd R&O.
Schools and Libraries News Brief dated February 18:
Last Friday's SLD News Brief appears to provide some relief, at least for existing contracts. Based on a principle incorporated in a footnote in the 3rd R&O, that permitted the allocation of basic and non-basic maintenance services for existing contracts at that time, the FCC has instructed USAC to permit similar cost allocations for those contracts affected by the change in maintenance eligibility made in the 6th R&O. This guidance is applicable to all multi-year contracts that were in existence prior to the effective date of the 6th R&O (January 3, 2011).
While good news in principle, the SLD News Brief goes on to provide four examples of acceptable cost allocation - none of which apply to the problem at hand. Their first two examples cite 24-hour monitoring as being ineligible as basic maintenance. This has been ineligible since the basic maintenance clarification in the 3rd R&O. It has nothing to do with the unbundled warranties made ineligible by the 6th R&O. The next two examples deal with basic maintenance of ineligible or partially ineligible equipment. Applicants have always been able to use cost allocation to address these.
With some trepidation — and a warning that we may be proved wrong — here is an example, again using SMARTnet, of how cost allocation might work.
By permitting cost allocation, an existing SMARTnet contract would not be deemed totally ineligible. Instead, the service could be cost allocated into two components, namely (a) software maintenance and related service (the equivalent of CiscoBase), and (b) a time and materials break-fix service.
Cisco is telling its E-rate customers that CiscoBase is 80% of the cost. That seems high to us, but let's accept it.
Using Cisco's estimate that CiscoBase is 80% of the total, at least $800 of a $1,000 existing SMARTnet contract would be eligible. For the remaining $200, there are two possibilities, namely:
- The $200 might be deemed an ineligible unbundled warranty, and would not be funded at all; or, more likely,
- For initial funding purposes, the $200 portion could serve as an estimate of actual time and material services, but E-rate discount payments would be made at invoicing time only for services that are actually provided and billed.
The second approach would be consistent with last December's guidance that a fixed priced contract is allowable. For procedural simplicity, and barring any additional FCC or USAC guidance to the contrary, we recommend that funding requests for existing fixed-price maintenance contracts be split into two FRNs, one for ongoing maintenance support and one for an estimate of break-fix time and materials.
E-Rate Updates and Reminders
Form 470s for New Entities:
For a one-week period ending late last Friday, applicants with newly assigned entity numbers could not file Form 470s online. The online filing system was not recognizing the numbers and new applicants couldn't even get to the first page. As a temporary measure, the SLD downloaded a week's worth of new entity numbers (approximately 150) and manually loaded them into the online filing system. Applicants obtaining new entity numbers from midday last Thursday, when the download was done, may still experience problems and should call the SLD's Client Service Bureau (888-203-8100).
FCC CORES Modernization:
The FCC is considering changes to the Commission's Registration System ("CORES"). This is the system that assigns and tracks FCC Registration Numbers ("FCCRNs") which are required for every entity doing business with the FCC including E-rate applicants and service providers. One use of CORES is the administration of the FCC's Red Light system under which the FCC will hold FCC payments to entities which are delinquent in payments to the FCC or USAC. For E-rate applicants and service providers, this may halt payment on BEAR or SPI invoices, or lead to denial of pending funding, if either the applicants or service providers are Red Lighted.
One problem with CORES is that, while large companies and governmental entities may have multiple FCCRNs, those numbers are all tied together by common Taxpayer Identification Numbers ("TINs"). State agencies and all their various component operations, for example, may share the same state TIN. If action by one FCCRN leads to a Red Light situation, all FCCRNs under the same TIN are equally affected. Several times last year, state or school district E-rate applicants received Red Light notices for delinquency situations over which they had no control. Such problems were ultimately, but not easily, traced to other state agencies or, in one case, to another school district.
Last December, the FCC released an NPRM (FCC 10-192) proposing changes to modernize CORES by, in part, by establishing a single FCCRN for each TIN with linked sub-accounts. This should make it easier to coordinate Red Light notices among related entities. On March 10th, the FCC will hold a public forum on the proposed changes (see Public Notice).
E-Rate Central's FCC comments on the E-rate implications of the CORES modernization are available online.
Note that as of this year, an FCCRN is required on all Form 471s. New applicants, who do not yet have FCCRNs, can easily apply for them on the FCC's CORES Web site).