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 42 for FY 2010 will be released on Tuesday, March 15th, for $38.9 million. This will increase cumulative funding for FY 2010 to $2.37 billion. Priority 2 funding is still being awarded at 81% and above, and denied at 79% and below.

Wave 82 for FY 2009 will be released on Wednesday, March 16th, for $4.6 million. Cumulative funding stands at $2.8 billion.

Key FCC Decision on Basic Maintenance for FY 2011

Included in an FCC appeal decision in the case of Chicago Public Schools et al (FCC 11-39) was an important provision reversing a longstanding rule on basic maintenance contracts. The old rule had been problematic since its inception, but had become untenable under the FCC's new ruling making unbundled warranties ineligible.

The old rule dates back to 2003 in the FCC's Third Report and Order (FCC 03-323). One important element of that Order narrowed the eligibility of maintenance to "basic" maintenance. It then went on to "clarify" that a technical support contract providing any service other than basic maintenance would be fully ineligible. If a contract included both basic and non-basic maintenance, the non-basic portion could not be allocated out — instead E-rate funding for the entire contract would be denied.

Note that there is a subtle, but important, distinction between types of services provided and types of equipment being serviced. As long as the contract was for basic maintenance service, an applicant could allocate out any costs related to ineligible equipment. But, if the contract included any maintenance services other than basic (e.g., technical consulting, remote monitoring, etc.), then the entire contract was ineligible.

Most applicants adapted well to this change, either narrowing the scope of their maintenance contracts or, if they needed more services, creating pairs of contracts (one for basic, one for non-basic). Further, given the harshness of this rule, it helped that USAC reviewers were not overly strict in defining basic maintenance.

But this year, things changed. Under the Eligible Services List for FY 2011, "unbundled warranties" became ineligible. Although the poster child for unbundled warranties was Cisco's SMARTnet, the problem was much broader. The new rule applied to any type of maintenance agreement with an insurance type component (i.e., under which an applicant would pay whether anything breaks or not). Effectively, the FCC is saying that it will only pay discounts on maintenance services actually performed.

But many maintenance contracts include actual ongoing maintenance work plus a contingent allowance for additional break/fix work. SMARTnet is a good example. It provides ongoing software fixes and support, which the FCC considers eligible and will cover annually. But there is also a true warranty component that leads to work only if the equipment breaks. While E-rate will pay time and material charges if something breaks, the warranty itself is ineligible.

Under the Third Report and Order, this had become a major issue for FY 2011. Since a contract, such as SMARTnet, contained an ineligible warranty component, the entire contract would presumably be ineligible. This is why earlier SLD guidance indicated that SMARTnet was ineligible, and why Cisco proposed to replace it with an ongoing maintenance product (called CiscoBase) and a separate time and materials service.

As this newsletter discussed in several articles over the past six months, the maintenance issue has been confusing for everyone. Questions were raised on such topics as: (a) the status of existing multi-year contracts (and whether they had to be re-bid); (b) what services could safely be considered ongoing; and (c) how to estimate time and material charges.

A rational tendency in such a situation might be for applicants to throw up their hands, apply for whatever maintenance they needed, and see what ultimately happened during PIA review — rational, that is, if not for the Third Report and Order. Under the Order, this was an all or nothing strategy. Guess wrong, get nothing.

Two weeks ago, a partial solution emerged. Consistent with a footnote in the Third Report and Order, which at the time had permitted applicants to split out ineligible services in existing contracts, similar guidance was provided this time around. The costs for existing SMARTnet contracts, for example, could be allocated between ongoing maintenance and an estimate for time and materials.

The importance of last week's decision, reversing the problematic provision of the Third Report and Order, is that it gives USAC the flexibility to allocate any type of service on maintenance contracts, effective for FY 2011. Taken together, the earlier guidance and last week's decision permit allocation for both existing and new contracts.

The fun is not completely over. It has yet to be determined how USAC will handle actual allocations, if needed, and to what extent it will evaluate and approve estimates of break/fix time and material costs. Fortunately the specter of total denial of maintenance requests, once a real possibility under the Third Report and Order, has been greatly diminished.

E-Rate Updates and Reminders

FCC Announces EDU2011 Participants:

The FCC announced the selection of nineteen schools and one library, spread over fourteen states, to participate in its wireless off-campus Internet access pilot program for FY 2011. Although the actual funding needs of the 20 participants will not be known until their applications have been filed and reviewed, the FCC estimates that at least $9 million of the $10 million set aside for the pilot will be utilized. The selected 20 participants are:

1. Aurora Public Schools (Aurora, CO)
2. Boys' Latin of Philadelphia Charter (Philadelphia, PA)
3. City School District of New Rochelle (New Rochelle, NY)
4. Clay Hill Elementary School (Jacksonville, FL)
5. Foxfire Center for Student Success (Zanesville, OH)
6. Greater Southern Tier Board of Cooperative Educational Services (Watkins Glen, NY)
7. Haralson County Board of Education (Buchanan, GA)
8. Katy Independent School District (Katy, TX)
9. Michigan Technical Academy (Redford, MI)
10. Mohican School in the Out-of-Doors, Inc. (Butler, OH)
11. Onslow County Schools (Jacksonville, NC)
12. Orleans Parish School Board (New Orleans, LA)
13. Piedmont City School District (Piedmont, AL)
14. Riverside Unified School District (Riverside, CA)
15. Roy Municipal Schools (Roy, NM)
16. San Diego Unified School District (San Diego, CA)
17. Sioux City Community School District (Sioux City, IA)
18. Southern Tier Library System (Painted Post, NY)
19. Summit Academy Community School for Alternative Learners (Canton, OH)
20. Westwood Community Schools (Dearborn Heights, MI)

Additional details on these awards, including brief summaries of the pilot projects are available in the FCC's News Release and Public Notice (DA 11-439).

One additional piece of good news is that the FCC is apparently rebranding the pilot program by changing its name from "E-rate Deployed Ubiquitously (EDU) 2011 Pilot Program" — an awkward name if there ever was one — to the 2011 "Learning On-The-Go" ("LOTGo?") wireless pilot program.

Initial Comments on 80% Priority 2 Funding Threshold Issue:

The FCC received a number of comments last week from applicants, educational organizations, and E-rate consultants on USAC's recommendation to cap the FY 2010 Priority 2 funding threshold at 81% and on Funds For Learning's petition to wait and/or apply other funds to permit lowering the threshold to 80%. The three key issues involved in this controversy are:

1. How important is it to fund Priority 2 at 80% for FY 2010 (assuming it may be difficult to get down to this level in subsequent years)?
2. Is it more desirable to set the threshold now (to provide certainty) than to delay the threshold decision pending the potential availability of additional funding?
3. Most specifically, should currently identified unused funds for previous years be applied now to FY 2010 (as suggested by Funds For Learning), or be rolled over into FY 2011 as has been the custom?

The following table summarizes the positions taken by various comment filers:

* Interestingly, ALA's filing did not focus on the importance of 80% - a level that is important to libraries constrained to matrix discounts.

** AASA/AESA, as members of EdLiNC, filed separate comments. The two filings, however, are based on the same data analysis and express similar points of view.

The one point of consistency in this set of comments is that no one liked the idea of tapping into funds expected to be rolled over into FY 2011 in order to provide additional funding for FY 2010. The oft-expressed concern was that taking this money away from FY 2011 might jeopardize even 90% Priority 2 funding next year. A more common view was that the FCC should not rush to cap funding at 81%, but rather wait to see what additional funds are made available by applicants filing Form 500s to reduce funds that they have already been awarded - even if this means waiting until late in 2011 after the recurring service invoice deadline on October 28th.

Reply comments on this proceeding are due today, March 14th.

Schools and Libraries News Brief dated March 11 - Item 21 Attachments

The SLD's March 11th News Brief discusses the preparation and filing of Item 21 attachments. The following outline summarizes the topics covered:

1. Telecommunication service attachments:
   1. Provide the specific type(s) of services requested.
   2. For telephone services, provide the number of lines, including extensions (the first time that USAC's guidance has indicated that extensions should be included in line counts).
   3. For digital transmission services, provide the bandwidth.
   4. If bills are submitted, identify any ineligible charges.
2. Internet Access attachments:
   1. For digital transmission services for Internet, provide the Internet bandwidth.
   2. For Web hosting services, include cost allocation documentation (from provider).
3. Internal Connections attachments:
   1. Provide a make, model, and quantity list of all equipment.
   2. For bundled products, also provide SKUs.
   3. Clearly identify functions of equipment (e.g., servers) that can be used in both eligible and ineligible ways.
   4. For cabinets, racks, UPSs, etc., identify equipment supported.
4. Basic Maintenance of Internal Connections attachments:
   1. Provide a make, model, and quantity list of all equipment being maintained.
   2. State the basic maintenance tasks to be performed and their associated costs.
   3. Clearly identify eligible and ineligible equipment being maintained.
   4. Note: As indicated above, the SLD has not yet provided guidance on what documentation should be submitted to support estimates
      of time and material charges.
5. Item 21 attachment filings:
   1. Can be filed online as a part of the online Form 471 application process.
   2. Can be e-mail, faxed, or mailed separately.