One day after we mildly chastised the FCC, in our last newsletter, for not releasing the long-awaited Category 2 Order, they did so. Such is the power of the press!
The Category 2 Order (FCC 19-117) permanently adopts (with some simplifying changes) the basic 5-year budgeting process that had been in effect on a trial basis for FY 2015-2019. The new rules take effect on an ongoing basis as of FY 2021 with special transitional rules for FY 2020. The Order does not include the Eligible Services List (“ESL”) for FY 2020 but does address a few of the outstanding ESL issues and updates the equipment transfer rules.
Category 2 Rules for FY 2020:
The FCC order extends the existing Category 2 budgeting mechanism, which was set to expire after FY 2019, through FY 2020 — essentially converting five-year budgets into six-year budgets by expanding the budgets by 20%. For FY 2020:
- Budgets will still be calculated on a per school or per library basis.
- The basic budgetary factor for FY 2020 will be adjusted upward from FY 2019 to reflect inflation. The precise inflation factor has yet to be finalized but is estimated as 2.1%. At this rate, including the additional 20%, the prediscount budget factors are estimated to be:
- $195.63 per student for schools.
- $3.00 per square-foot for rural libraries.
- $6.52 per square-foot for urban libraries (local codes 11, 12, and 21).
- $11,998.43 minimum budget per entity.
- The actual FY 2020 budget for any school or library would exclude any committed Category 2 funding for the period FY 2015-2019.
- All Category 2 budgets will expire at the end of FY 2020 (i.e., no carryover into FY 2021).
Category 2 Rules for FY 2021 and Beyond:
Category 2 rules going forward are designed for greater simplicity. Beginning in FY 2021:
- The Category 2 budget mechanism will utilize fixed five-year cycles, i.e. FY 2021-2025, FY 2026-2030, etc.
- Budget factors will be fixed for the entire five-year period and adjusted for inflation only once at the start of each new five-year cycle.
- Budgets will be calculated and administered on a districtwide or systemwide basis for school “districts” and library “systems.”
- A school district is defined as “all schools that fall under the control of a central administrative agency” (including for example, a group of centrally-managed charter schools)
- Conceptually, library systems would be handled and defined similarly.
- Non-Instructional Facilities (“NIFs”) remain ineligible for Category 2 funding.
- The budget factors for FY 2021-2025 have been pre-determined.
- $167.00 per student for schools (counting full-time students only).
- $4.50 per square-foot for libraries (regardless of locale code).
- $25,000.00 minimum budget per entity.
- The total budget for a school district or library system is calculated for FY 2021-2025 as the greater of:
- $167.00 times the number of total students or $4.50 times the total number of square feet; or
- $25,000.00 (the entity minimum) times the number of schools or libraries.
Note: the $25,000 minimum entity option will prove superior if the average size of a district’s schools is less than 150 students or a system’s average library is less than 5,555 square feet.
- Districts of 10 schools or less, and systems with 10 libraries or less, have a hybrid option for calculating budgets for individual schools or libraries using either the $167/student, $4.50/sq.ft., or $25,000 minimum calculation, then summing the individual results for a total budget.
“Either-and” not “Either-or”:
Here’s a question for any E-rate applicant who used little or no internal connections funding over the past five years: “Should I apply for Category 2 funding in FY 2020 or should I wait until FY 2021 or later?”
The proper response to this question is to recognize that this is an improper question. The best strategy under the FCC’s new Category 2 rules is not “either-or;” it’s “either-and!” Applicants who have used no Category 2 funding to date qualify for receiving six years’ worth of Category 2 funding in FY 2020 and five years’ worth of funding over the five-year period FY 2021-2025. The FY 2021-2025 opportunity is good; the FY 2020 opportunity is spectacular!
Consider these prediscount budget examples for schools and libraries that have not used any Category 2 funding to date:
| For a school district with 1,000 students: |
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FY 2020 @ $195.63 per student: |
$195,630.00 |
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FY 2021-2025 @ $167.00 per student: |
$167,000.00 |
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| For an urban library of 10,000 square-feet: |
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FY 2020 @ $6.52 per square-foot: |
$65,200.00 |
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FY 2021-2025 @ $4.50 per square-foot: |
$45,000.00 |
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| For a rural library of 10,000 square-feet: |
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FY 2020 @ $3.00 per square-foot: |
$30,000.00 |
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FY 2021-2025 @ $4.50 per square-foot: |
$45,000.00 |
Ignoring the possible benefits of the $25,000 minimum budget factor that can provide additional budget benefits beginning in FY 2021, these examples illustrate the importance of the sixth-year step-up in the budget factors for the upcoming year. Rural libraries will receive a substantial increase in Category 2 budgets in FY 2021 whether they apply for funding in FY 2020 or not. Schools, school districts, and urban libraries also receive healthy five-year budgets as of FY 2021 but have been given an even larger one-year budget for FY 2020. These are “either-and” opportunities not to be missed.
ESL and Other Issues:
In addition to its new Category 2 budget rules, the FCC’s Order addressed two other issues, namely:
- In reference to the Eligible Services List (“ESL”) for FY 2020, which has not yet been released (but is expected soon), the FCC ruled as follows:
- Basic Maintenance of Internal Connections (BMIC), Managed Internal Broadband Services (MIBS), and caching servers remain eligible.
- No new services will be added to the Eligible Services List.
- The FCC has waived the 60-day ESL release requirement for the opening of the Form 471 application window for FY 2020. This should permit USAC to open the window as planned by mid-January.
- The transfer of equipment between schools in a district or between libraries in a system no longer needs to be reported to USAC. (Note: transfer records, including reasons for transfers, must be maintained for five years; and asset and inventory records are required to be retained for ten years after purchase).