News of the Week

Funding Status

The application window for FY 2011 is scheduled to close at 11:59 p.m. EDT on Thursday, March 24, 2011.

Wave 40 for FY 2010 will be released on Tuesday, March 1st, for $14.7 million. This will raise cumulative funding for FY 2010 to $2.3 billion. Priority 2 funding is still being awarded at 81% and above (see below).

No funding wave for FY 2009 is scheduled for release this week.

The 80% Funding Threshold Controversy

Last December, USAC lowered the interim funding threshold for Priority 2 funding for FY 2010 to 81%. This is still the effective level. Funding is being awarded at 81% and above, and denied at 79% and below. The only remaining issue is whether Priority 2 will be funded at 80% — an important level for many applicants.

At a meeting of the USAC Board's Schools and Libraries Committee on January 24, 2011, the Committee decided to recommend to the FCC that the final Priority 2 funding threshold for FY 2010 be set at 81%, and that funding at 80% (and below) be denied. This decision was based on USAC's estimate that the effective demand at the 80% level would be about $204 million, but that there would be less than $33 million to fund it.

It should be noted that both the $204 million and $33 million figures were based on projections of final funding decisions on FY 2010 applications still pending — not all of which are expected to be funded — plus set-asides for administrative expenses and appeal reserves. As an example, we calculate that, as of last week, there were over 1,800 applications pending that included over $275 million in Priority 2 requests at 80% — well above the $204 million that USAC estimates would actually be required to fund that level.

The recommendation to cut-off funding at 81% came as a disappointment — and a bit of a shock — to observers who had been expecting a funding threshold below 80%, similar to the final 77% level achieved for FY 2009. Indeed, the broad indicators for FY 2010 were slightly more favorable than for FY 2009. In particular:

1. The original estimate of total FY 2010 demand, released early last March, was $3.92 billion, slightly below the equivalent $3.99 billion demand figure for FY 2009; and
2. The supply of funds for FY 2010 was over $20 million dollars higher than FY 2009 because of a 0.9% positive inflation factor.

Taken together, the two factors might reasonably have been expected to improve the funding prospects for FY 2010 by an increment of about $90 million. Instead, USAC's recent estimates would suggest that funding for FY 2010 will fall $200 million or more short of FY 2009's Priority 2 funding level.

On February 11th, Funds For Learning ("FFL") filed a petition with the FCC arguing that additional monies are or will become available, and that a decision to cut-off Priority 2 funding at 81% now is premature. On February 18th, the FCC issued a Public Notice seeking comments on the FFL petition. Comments are due by March 7th; reply comments are due by March 14th.

The key issues involved in this controversy are as follows:

1. Priority 2 funding at 80% is a critical level for individual schools and libraries. Such applicants never have access to funding based on mid-matrix average threshold percentages (most specifically 81-89%). Based on ever-increasing demand for Priority 1 funding and the unlikelihood of annual roll-over funding in excess of $900 million (a number so far achieved only in FY 2009 and FY 2010), this may be the last year that 80% Priority 2 funding remains a possibility.
2. Final demand numbers are historically difficult to project, particularly without access to detailed USAC data. Here are two indications of the problem:
   1. As of this point in the FY 2010 funding cycle, USAC has committed $2.28 billion and probably has about $500 million more to go. Yet, funding requests still pending (including Priority 2 at 80%) potentially total $1.38 billion (including $365 million in remaining Priority 1 requests). Clearly, USAC expects that a number of the remaining requests will be canceled or denied.
   2. For FY 2009, the final funding total appears to be leveling off at about $2.79 billion, which is just under 70% of the originally reported preliminary demand (referenced above). The comparable percentages for FY 2006-2008 were 55%, 65%, and 58%, respectively. USAC itself is best positioned to estimate the percentage for FY 2010.
3. Establishing a final threshold for Priority 2 funding in February of a funding year, as USAC proposed, would have been unusually early. The following table compares the timing and particulars of USAC's funding threshold recommendation for FY 2010 with those of the previous five years. Note that for FY 2005, the last year USAC stretched to reach 80%, the final decision was not made until January of the following funding year — eleven months later than this year's recommendation.
    

   			Threshold Set
   Funding Year	Discount Rate Threshold	Additional Funding Available	Wave	Date
   2010	81%	$900M roll-over + $20M inflation	36	Feb-11	Recommended
   2009	77%	$900M roll-over	64	Aug-10
   2008	87%	$600M roll-over	74	Dec-09
   2007	81%	$650M roll-over	46	Apr-08
   2006	86%	None	47	Apr-07
   2005	80%	None	66	Jan-07

   
   Several observers have postulated that one reason for USAC's recommendation to set the threshold early this year is as an administrative convenience. It would eliminate USAC's need to review the approximately 1,800 FY 2010 Priority 2 applications at 80%, permitting USAC to focus more resources on FY 2011 applications.
4. Three sources of additional funding are at least theoretically available for FY 2010, any one of which could eliminate USAC's projected gap for 80% funding. In particular:
   1. The longer a final decision is deferred, the more funds are likely to be released by applicants filing Form 500s after finding that they will not be using already committed awards. A strong argument can be made for waiting until at least November, following the October 28th invoicing deadline for recurring services, when funded applicants have a better grasp of actual need.
   2. Although it has not done so in recent years, USAC could take advantage of its annually-renewed exemption from the Anti-Deficiency Act ("ADA"). Recognizing that awarded funds have never been fully utilized, the ADA exemption would permit USAC to safely over-commit available FY 2010 funds.
   3. FFL's petition noted that USAC has already identified $400 million in unused funds from previous years. Although such funds have traditionally been rolled over into the next funding year, FFL argues that the FCC has the flexibility to add such roll-over funds into the current year. While such an action would reduce funding available for FY 2011, FFL argues that the ability to fund at 80% for FY 2010 makes this a worthwhile trade-off — taking us back to the first issue discussed above.

It will be interesting to see how this plays out. But we give the FCC credit for soliciting public comments on the issues and trade-offs.

E-Rate Updates and Reminders

Timely and Late-filed Form 470s for FY 2011:

Since Form 470s must be posted for 28 days, the last day to file a valid Form 470 for FY 2011 was last Thursday, February 24, 2011. Twenty eight days from that date will be March 24th, the deadline for Form 471 applications. Last Wednesday, the SLD released a special Form 470 Deadline Reminder noting the importance of this date.

Applicants who met that deadline are now positioned to meet the Form 471 deadline, but it is critical that they wait the required 28 days. We stress this because: (a) it's an E-rate rule; and (b) the SLD may be about ready, as they've done the last few years, to send somewhat confusing letters labeled "Notification of Form 470 Posted but No Associated Form 471" to every applicant who posted a valid Form 470, but who has not yet — as most have not — filed a Form 471. Applicants should not let these letters spook them into filing premature Form 471s.

Applicants who filed their Form 470s on or after January 10th, the day the new version of the Form 470 became effective, may have noticed that they have not yet received their customary Receipt Notification Letters ("RNLs"). We believe that, given more important system upgrades and fixes, RNL generation has been assigned a lower priority. Since there is very little that can be changed via an RNL anyway, we view this as an appropriate trade-off.

Any applicant who missed the Form 470 deadline most likely has a real problem. The following alternatives can be considered:

1. Any services being provided under a multi-year contract, executed under a valid Form 470 for an earlier funding year, and extending through FY 2011, can covered by a Form 471 for that service citing the earlier Form 470.
2. Some states provide master contracts for E-rate eligible services. These are valid for E-rate purposes if both of the following conditions are met:
   1. The state filed a valid Form 470 for the service; and
   2. The contract was competitively bid, meaning that, at least on a regional basis, there was a single winner. If the contract involves a multi-vendor award, the applicant must conduct a "mini-bid" among all contract vendors.
3. As a last resort, file a late Form 470 anyway in the hope that:
   1. A large snow storm (as occurred last year) or a major SLD system problem leads to a last minute extension of the application window; or
   2. Upon appeal, which is not typically a quick process, the FCC may waive the application deadline. In the past, the FCC has shown some flexibility if the delays are 15 days or less.

Online Block 4 Uploads:

Larger applicants with past experience in uploading formatted Block 4 data into online Form 471s should note that the SLD has updated its instructions and file format to reflect the new data elements in the new version of the Form 471. The new bulk upload instructions are available on the SLD Web site.

Recent FCC Appeal Decisions:

The FCC released three more appeal decisions last week affecting nine applicants. The decisions were standard fare denying one applicant's unsupported request for a higher discount rate (DA 11-291), permitting three applicants to provide additional application information (DA 11-301), and extending service delivery deadlines for five other applicants (DA 11-303).

Schools and Libraries News Brief dated February 25 — Form 471 Application Process

The SLD's February 25th News Brief discusses a number of aspects of the Form 471 application, including:

1. Required billed entity information (in Block 1);
2. Recipient of service information (in Block 4);
3. Establishing Form 470, service, and contract information (in Block 5); and
4. Applicant financial resources (required in the Block 6 certifications).