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E-Rate Central News for the Week
December 28, 2015

Introduction

The E-Rate Central News for the Week is prepared by E-Rate Central. E-Rate Central specializes in providing consulting, compliance, and forms processing services to E-rate applicants. To learn more about our services, please contact us by phone (516-801-7804), fax (516-801-7814), or through our Contact Us Web form. Additional E-rate information is located on the E-Rate Central website.

Funding Status

Wave 73 for FY 2014 will be released on Thursday, December 31st. Funding for FY 2014 is available for Priority 1 services only. Priority 2 funding has been denied at all discount levels. Cumulative funding for FY 2014 is $2.28 billion.

FY 2016 E-Rate Funding

USAC announced that $1.9 billion will be available in carry-forward funding into FY 2016. Added to the annual $3.9 billion cap (plus inflation) set by the FCC last December, this means up to $5.8 billion in total E-rate funding is available for FY 2016. That’s the good news.

The bad news — or at least the more confusing news — is that the exact sources of funding for FY 2016 are not clear. There are two potential problems with projecting available funding.

Roll-Over Funding:

USAC’s announcement credits the potential $1.9 billion in roll-over funding to the FCC’s guidance on cash reserves provided in December of 2014. It was that change in reserve policies that created what would appear to have been a one-time increase that supported the $1.575 billion roll-over of previously unused funds into FY 2015.

Each quarter, USAC issues a Fund Size Projections report. Last year, the E-rate surplus jumped from $600 million at the end of the first fiscal quarter ending September 30, 2014, to $1,575 million for the second quarter ending December 31, 2014 — an increase of $975 million. Over $900 million of this increase could be attributed directly to the reserve policy change (see our newsletter of December 29, 2014).

This year, the comparable first quarter projection (dated November 2nd) showed available E-rate funds of only $470 million, presumably under the same reserve policy that was instituted last December. But USAC’s recent announcement indicates that $1.9 billion is now available — a bigger increase off of a smaller base than last year. Our conclusion is that something else has changed — we just don’t know what. Pending more information from USAC, we will have to wait until the projections for the second fiscal quarter ending December 31, 2015, are released on or about February 1, 2016.

Regular E-Rate Contributions:

Although last year’s FCC Order (FCC 14-189) raised the allowable annual cap on new E-rate funds by roughly $1.5 billion to a maximum of $3.9 billion, USF contributions for E-rate have never actually approached this level. Lower E-rate demand for FY 2015, combined with the $1.575 billion in roll-over funding (which is utilized first), has meant that USAC only had to collect about $2.5 billion this year, not the entire $3.9 billion.

Politically, this has been fortunate. One factor watched closely is the quarterly contribution percentage required to fund all USF programs. The Proposed First Quarter 2016 Universal Service Contribution Factor (DA 15-1412) was 18.2% — a historically high level. In the fall of 2014, FCC Commissioner O’Rielly put this in prospective by releasing the following table showing the contribution factor trend:

USF Contribution Over Time

The most recent quarter, breaking the 18% level, included just under $640 million for E‑rate. If USAC had been collecting at the annual rate of $3.9 billion, the quarterly E-rate requirement would have been $975 million. Everything else being equal, this would have meant a contribution factor of 20.9% — essentially off the chart!

Early Indications of Supply & Demand:

USAC’s preliminary demand projections for FY 2015 totaled just over $3.9 billion, down roughly $900 million from FY 2014. Although it’s obviously too early to gauge FY 2016, our expectation is that demand will rise as applicants take advantage of the new incentives for fiber system construction, and as more applicants apply for Category 2. Overall, we would expect that the $5.8 billion maximum implied by the $1.9 billion carry-forward announcement would be enough to assure full funding of both Category 1 and Category 2. Should it be required, however, raising the entire $5.8 billion may not be politically palatable. We continue to emphasize that FY 2016 will be an interesting and challenging E-rate year.

Updates on USAC’s E-Rate Productivity Center

Consortium Accounts Listed as Districts:

Most EPC accounts, when initially set up by USAC, were based on information carried over from the FY 2015 Form 471 applications. In this process, unfortunately, certain consortium applicants were designated as school districts, not consortia. Such misclassifications could be confusing to service providers responding to Form 470s. More importantly, the district vs. consortium classification determines Form 471 entity listings and discount calculations.

To date, the EPC system does not have the capability to change the “Applicant Type” of a specific BEN from “School District” to “Consortium.”  A fix for this problem is expected next month. In the interim, there are two options.

  1. The applicant can apply for a new billed entity number, making sure it is designated as a “Consortium.”  This will mean establishing a new EPC account, signing in as an Account Administrator, designating additional users (all with new email addresses), and adding consortium members. Besides the additional work, this will mean that historic E-rate data will be associated with the original BEN for FY 2015 and earlier, and with the new BEN for FY 2016 and later.
  2. Alternatively, the applicant can wait until the system is fixed (hopefully in January), then request a designation change. (Interestingly, the ability to fix a similar problem in which library systems were incorrectly designated as library outlets was fixed last October — see USAC’s Special Edition News Brief on October 20, 2015.)

USAC has advised consortium applicants with incorrect “district” designations that they can file Form 470s, but that their consortium status, and a list of the consortium members, should be noted in the Narrative section. We suggest that Narrative include such language as:

    1. “[Applicant Name (BEN XXXXXX)] is a consortium (not a “district” as is currently shown in EPC);” and
    2. “This consortium Form 470 [and RFP] is issued on behalf of [Member Name (BEN YYYYYY)], [Member Name (BEN ZZZZZZ)],etc.”  If the member list is long, save it as an appropriately named file and upload it into EPC as an RFP document.

Installment Payment Option on Broadband Transport and Internet Services:

Last December’s FCC Order (FCC 14-189) included a provision allowing applicants to pay the non-discounted portion of non-recurring broadband construction costs on an installment payment schedule of up to four years, while permitting E-rate discounts on the full installation costs in the first year. This provision is unusual because in all other E-rate situations, the applicant’s non-discount share must be paid coincident with E-rate discount payments.

The one requirement which the FCC placed on the installment option is that applicants must request — and the vendor(s) must agree to provide — installment payments as a part of the procurement and contracting process. Applicants filing a Form 470 requesting broadband transport and/or Internet are required to check “Yes” or “No” to the following question:

If an applicant is uncertain about seeking an installment payment plan, there is no downside to checking “Yes.”  Checking “No” on a non-RFP Form 470, eliminates the option.

Checking “No” on a Form 470 with an RFP should be reversible as a minor — i.e., not a “cardinal” — change. As long as the procurement cycle is still open, an applicant should be able to amend the RFP to include the installment payment option, and upload the amendment into the EPC system. Be sure to give the uploaded file a properly descriptive filename.

E-Rate Updates and Reminders

FCC Decision Watch:

The FCC issued an Order (DA 15-1434) last week terminating an E-rate investigation of the New York City Department of Education (“NYC DOE”) for funding years 2002-2013. With two small exceptions, NYC DOE’s E-rate funding has been effectively frozen since FY 2011.

At the heart of NYC DOE’s “black hole” problem was an earlier investigation instigated by the district itself. It found that an independent technology consultant, working as a NYC DOE project manager, had “orchestrated…a subcontracting scheme” under two of NYC DOE’s primary vendors to “misappropriate” funds from NYC DOE. An unidentified portion of these funds may have involved E‑rate. The consultant was subsequently convicted and jailed for fraud, ordered to pay $1.7 million in restitution, and debarred from the E-rate program. The FCC’s investigation continues for the two suppliers (identified in the consultant’s trial as IBM and Verizon).

The NYC DOE agreement has several components, namely:

  1. Payment of $3 million. The agreement does not indicate how this amount was calculated; it might simply represent a recovery of the FCC’s investigative expenses.
  2. Withdrawal of outstanding funding requests for funding years 2011–2013 (and of additional claims against previous commitments for years 2002–2010). The agreement does not affect pending funding requests totaling $76.5 million for 2014 and 2015.
  3. Finalization of an extensive, two-year, compliance agreement, initially executed on an interim basis in June 2014. The agreement requires NYC DOE to have an E-rate Compliance Officer on staff, conduct independent E-rate audits, and to retain both an Independent Compliance Examiner, and an Independent Compliance Monitor.

There have been E-rate agreements with large school districts like this before, most notably with Dallas and Houston in 2009–2010. In these cases, however, serious gifting and bribery charges were leveled against district personnel. Not so in New York City. Clearly the consultant fraud problem was a trigger, but, as acknowledged in the final Order, this problem had arisen “without NYC DOE’s knowledge or agreement.”  At no point has the FCC publicly indicated any problems with NYC DOE itself (nor did the final agreement require “an admission by NYC DOE of a failure to comply with the E-rate Program Rules”).

To applicants, black hole E-rate situations are exercises in frustration. They can take years to resolve, often without a clear indication of USAC’s and/or the FCC’s concerns. Settlements are sometimes the only solution. The two lessons learned from other applicants similarly involved are: (1) always take special care with procurement, and (2), always document everything.

Form 486 Deadlines for January 2016:

The Form 486 deadline for certifying the start of service (and CIPA compliance, if applicable) is 120 days from the later of the FCDL approval date or the start of service date. The FY 2015 deadline for applicants funded in Wave 14 (adjusted to Monday since the 120-day deadline falls on a Saturday) is today, December 28th. January’s deadlines for approved FY 2015 applications are:
                                          Wave 15                01/04/2016
                                          Wave 16                01/12/2016
                                          Wave 17                01/18/2016
                                          Wave 18                01/25/2016
                                          Wave 19                01/29/2016

No S&L News Brief Last Week:

USAC, as has been its tradition during the holiday season, did not publish its regular weekly News Brief last Friday. We wish everyone a wonderful New Year.

Disclaimer: This newsletter may contain unofficial information on prospective E-rate developments and/or may reflect our own interpretations of E-rate practices and regulations. Such information is provided for planning and guidance purposes only. It is not meant, in any way, to supplant official announcements and instructions provided by either the SLD or the FCC.