This is the fifth in what we began as a four-part series of articles late last year on Category 2 budget and E-rate application strategies. Given what is known — and unknown — about the Category 2 funding rules and procedures, our objective is to explore how a Category 2 application (or applications) could or should be structured for maximum funding and flexibility. Links to the earlier articles in this series are:
Part 1: Introduction to Category 2 budget strategies
Part 2: Strategies dealing with eligible project costs exceeding Category 2 budget caps
Part 3: Multi-school cost allocation and FRN filing strategies
Part 4: Multi-year budget strategies
The first four parts of the series focused on Category 2 equipment purchases. We now turn our attention to Basic Maintenance of Internal Connections (“BMIC”).
Applying for E-rate discounts on basic maintenance services has never been particularly easy, and became less so in FY 2010 when the FCC ruled that “unbundled warranties” were no longer eligible. Thereafter, BMIC was eligible only for “actual work performed,” subsequently clarified to include so-called “break/fix” charges and limited agreements for “software upgrades and patches” and the like. Typically, to apply for a break/fix maintenance service, an applicant would estimate repair/replacement charges on a range of eligible equipment (often located in multiple schools) on a probability basis that considered historical repair experience and the age of the equipment. Assuming that only a portion of the covered equipment would actually fail during a given year, BMIC invoices could be filed against the overall discounted amount as the equipment was repaired and/or replaced.
Theoretically, BMIC remains eligible on the same basis in FY 2015. The new Form 471 Item 21 data requirements for BMIC, however, not only make the application itself more complex, but raise unanswered questions about how USAC will process BMIC invoices.
To understand the issue, let’s use a simple example. Suppose an applicant has $100,000 worth of E-rate eligible equipment located in two schools. Suppose also that the applicant expects that only a small percentage of that equipment will break during the coming year, and budgets $10,000 for break/fix maintenance. In past years, the applicant would have filed a single FRN for BMIC. The FRN would have been for the two schools combined, would have listed all the equipment as a group in a separate Item 21 attachment, and would have requested funding on the entire $10,000 pre-discount amount. Assuming P2-approved funding, invoices could have been filed as services were used up to the funded amount, regardless of which particular piece(s) of equipment failed and in which building the equipment was located.
For FY 2015, however, the new Form 471 requires the applicant to list all the equipment on a line-item basis in Item 21, assigning a portion of the total maintenance estimate to each line. Additionally, assuming a single FRN, each line-item cost must be allocated between the two schools. If we assume, for example, that there are five types of line-item equipment, some in each school, what had been a single estimated maintenance amount for the year now has to be allocated among ten separate “buckets” based on equipment type and school location.
Note that having made this allocation, the FRN as a whole still reflects a pre-discount total of $10,000. The concern, however, is that USAC may treat each individual Item 21 allocation as a maximum BMIC amount for that particular equipment type and school. If, for example, one specific equipment failure during the year results in a $9,000 repair charge, will USAC pay the full invoice (since it’s less than the $10,000 FRN funding cap)? Or will USAC limit payment on that invoice to the allocated Item 21 amount assigned to that specific equipment in that specific school?
At this point in the application window, we do not know the answers to these invoicing questions. We also do not know how such decisions, based on actual BMIC expenditures, will affect future Category 2 budgets. Our recommendation, at the moment, is to complete Item 21 BMIC allocations in the simplest and most consistent way possible in order to assure that the FRN total is correct and, most importantly, that the application can be successfully filed by the Form 471 deadline. We can then only hope that USAC (and/or the FCC) develops sensible procedures for dealing with BMIC invoices.
As a practical guide to allocating BMIC requests in the application process, we offer the following suggestion and observation:
- Using our example above, it appears that the simplest approach — consistent with the Item 21 format, but one that still requires an extra step with the new Form 471 — is to calculate a maintenance-to-cost percentage (10% in this case) and to arbitrarily assign that percentage to each equipment type in each school.
- As a matter of curiosity, we took a quick look at several of the very few BMIC applications that have been filed already for FY 2015. What we found was that, rather than providing complete lists of equipment to be maintained, a few applicants grouped equipment types into single line items, at most allocating the total maintenance expense among a couple of schools. In a couple of cases, the list of equipment maintained was relegated to the Narrative section of the FRN. In one other instance: (a) “Quantity” was expressed in maintenance hours, not equipment units; (b) “Make” referenced the “network for entire district;” and (c), “Model” made reference to “no specific item, covers networks as a whole.” This approach certainly simplifies the application filing process for BMIC FRNs — and the system accepted it! It remains to be seen if the resulting PIA review process remains equally simple.
One longer-term point to remember regarding BMIC funding is that committed maintenance funds for each school or library are deducted from that entity’s five-year Category 2 budget. To the extent that BMIC funding is not ultimately used, an applicant should file a Form 500 to reduce the committed amount, thus increasing the remaining budget.