There are two interrelated issues that need to be considered when discussing consortium discount rates. One is how the benefits of E-rate discounts are required to be distributed among consortium members; the other is the calculation of the actual consortium discounts. The first is an old, but not always well understood, issue; the second issue is or will be affected by the E-rate modernization process, including the proposed new version of the Form 471 application.
Distribution of Consortium Discounts:
E-rate applications have long included a certification that states: “I acknowledge that the discount level used for shared services is conditional, for future years, upon ensuring that the most disadvantaged schools and libraries that are treated as sharing in the service, receive an appropriate share of benefits from those services.” Although this certification does not specifically mention E-rate consortia, it is the distribution of consortium discounts that is affected the most.
Part of the introductory discussion in the consortium section (see Para. 286) of the Further Notice of Proposed Rulemaking (“FNPRM”) of the recent E-rate Modernization Order (FCC 14-99) states:
The Commission has said that consortium leads are expected to adjust the discount rate received by each member to more closely reflect that member’s individual discount rate. Despite that direction from the Commission, commenters suggest that consortium leads sometimes assign the consortium discount rate to all members regardless of members’ individual discount rate, which deters high-discount rate applicants from joining consortia because the consortium discount rate is often lower than their own rate.
One of the reasons that this rule has often been ignored — and perhaps the FNPRM statement is an indication that this is about to change — is that neither USAC nor the FCC has ever provided specific guidance to consortia as to how such discount rate adjustments should be made.
The mathematics required to proportionately distribute consortium discounts among members with different discount rates is not too difficult, but neither is it trivial. The basic problem is that the total consortium discount, calculated by multiplying the total pre-discount cost of service by the average consortium discount rate, is unlikely to equal the sum of the pre-discount cost of the individual members’ services multiplied by those members’ own discount rate. Depending upon the mix of service costs and member discounts, the difference could be plus or minus.
Our approach to determining this distribution is to calculate a proportionality (or “distribution”) factor based on these two totals. This factor represents the ratio between the actual consortium discount and the “nominal” discounts of the members. Consortium discounts can then be assigned proportionately to each member by multiplying this factor times each member’s nominal discount.
Excel worksheet templates and instructions for a Consortium Discount Distribution, are provided in the Forms Rack section of the E-Rate Central website. More details on this calculation method, including examples, were provided in a discussion of Invoicing and Funds Disbursement – Part 4 in our newsletter of January 11, 2010.
Two additional points should be noted in this discussion, namely:
- From a practical standpoint, these calculations and the resulting distribution to the members of proportional discounts, are a lot easier if they take place via the BEAR reimbursement process after the close of funding year once total pre-discount service costs are known. The process can also be used with the SPI discount process, but may involve mid-year estimates and/or yearend adjustments.
- As we interpret it, the FCC rule on consortium discount distribution applies only in those cases in which the members are being charged for the services being received for which they are entitled to their appropriate share of the resulting E-rate discounts. In other cases, such as certain state networks for which services are being paid for by the state, at no charge to the members, there are no discounts that need to be distributed to the members.
Calculating Consortium Discount Rates:
Technically, the E-rate Modernization Order makes no change in the way a consortium discount rate is calculated. It is still based on the simple average of the individual members’ discounts. What has changed, or what could change, are the following:
- Consortium member discounts for centrally-managed school districts and library systems will now be “matrix” discounts (i.e., 40%, 50%, 60% etc.).
- Within a given consortium application, the same average consortium discount will apply to all FRNs, even if some of those FRNs are used by only a subset of the members.
- The Further Notice of Proposed Rulemaking (“FNPRM”) seeks comments on a proposal to change the consortium discount calculation from a simple average to a student-weighted average (with libraries using a “student” to “square foot” equivalency factor). Although we do not believe that the benefits (if any) of such a change would outweigh the complexities introduced, we assume that the simple average will continue in use at least for FY 2015.
The big change for FY 2015, as reflected in the proposed revision of the Form 471 and instructions (see link to the draft Form 471 below and in our newsletter of September 22, 2014), is the requirement to use the same consortium discount rate for every FRN within a single consortium application (see #2 above). Indeed, it appears that USAC’s online Form 471 system will automatically calculate a single consortium discount based on the average of the matrix discount of all its members. By contrast, earlier versions of the Form 471 permitted a consortium applicant to create different Block 4 Worksheet Cs calculating separate average discount rates for individual FRNs used by member subgroups.
On the surface, this change appears to conflict with the FCC rule, discussed in the first part of this article, requiring a consortium leader “to adjust the discount rate received by each member to more closely reflect that member’s individual discount rate.” This may be harder to do if funding requests for a single consortium member or a subgroup of members are assigned the same overall consortium discount average. Use of the average would seem to benefit the lower discount members, while disadvantaging the higher discount members. To avoid such problems, a consortium needs to do some careful planning on application and discount distribution strategy.
One approach is to consider filing two or more separate consortium applications for services used by different member subgroups whose separately-calculated average discounts are also different. The filing of separate applications by a single consortium lead has been a common practice in the past, and we see no restriction on doing so in the future.
To the extent separate consortium applications are filed at different average discount rates, or at least within bands of average discount rates, it will still be important to assure that discounts received are properly and appropriately distributed to individual members as discussed above.
A second approach is to keep all FRNs in a single consortium application, but to distribute all discounts across all the FRNs (rather than distributing discounts on an FRN-by-FRN basis). The Member Funding tab in the Consortium Discount Distribution template referenced above is designed to tabulate pre-discount requests by all members across all FRNs. These amounts, in turn, provide the input for the calculations in the Member Distribution tab.
Depending upon the distribution of service costs and member discounts, the second approach may result in greater, less, or essentially equal total funding for each member. The analysis, however, takes some work.
One way to start planning for a consortium filing strategy for FY 2015 now is to analyze the impact of a single consortium discount rate on a multi-FRN application had it been in effect for FY 2014.
The steps needed for such a spreadsheet analysis are as follows:
- Summarize the funding and discount for the FY 2014 application, as filed.
- In Column A, list all FRNs.
- In Column B, list and total the pre-discount costs of all FRNs.
- In Column C, list the FY 2014 discount rates of those FRNs.
- In Column D, list or calculate the FY 2014 discounts requested for those FRNs.
- Create a similar pro forma analysis under the FY 2015 consortium discount rule.
- Calculate the pro forma consortium application discount rate by averaging the discount rates of all the individual members.
- In Column E, again list and total the pre-discount costs of all FRNs.
- In Column F, list the pro forma consortium discount rate (calculated in Step 2a) for each FRN.
- In Column G, calculate the pro forma FY 2015 discounts requested for those FRNs by multiplying Column E by Column F.
- In Column H, calculate the FRN-by-FRN difference between the FY 2014 actual requests and the pro forms FY 2015 requests.
- Total all dollar amount columns (Columns B, D, E, G, and H).
- Divide the total of Column D by the total of Column B. This gives the weighted-average discount for the entire application for FY 2014.
- Columns B and E should be the same.
- The total in Column H will equal the difference between the total discount requested in FY 2014 and the total pro forma discount for FY 2015.
- If the pro forma total for FY 2015 is higher than the requested total for FY 2014, a sensible strategy might be to again file a single multi-FRN consortium application.
- If the pro forma total for FY 2015 is lower than the requested total for FY 2014, the best strategy might be to split the FRNs into separate consortium applications for FY 2015. The same type of calculation can be used to calculate the expected impact of separate applications, both individually and in total.
A simple example of the results of this analysis, showing a minor benefit of the using a single consortium average, is provided below.
Consortium: FY 2014 Actual vs. FY 2015 Pro Forma
| A |
B |
C |
D |
E |
F |
G |
H |
| FRN |
FY 2014 Funding |
FY 2015 Pro Forma |
2015 - 2014
Difference |
| Pre-Discount |
Rate |
Discount |
Pre-Discount |
Rate |
Discount |
| FRN-1 |
1,000.00 |
50% |
500.00 |
1,000.00 |
67% |
670.00 |
170.00 |
| FRN-2 |
16,000.00 |
63% |
10,080.00 |
16,000.00 |
67% |
10,720.00 |
640.00 |
| FRN-3 |
3,000.00 |
72% |
2,160.00 |
3,000.00 |
67% |
2,010.00 |
(150.00) |
| FRN-4 |
25,000.00 |
60% |
15,000.00 |
25,000.00 |
67% |
16,750.00 |
1,750.00 |
| FRN-5 |
210,000.00 |
71% |
149,100.00 |
210,000.00 |
67% |
140,700.00 |
(8,400.00) |
| FRN-6 |
45,000.00 |
50% |
22,500.00 |
45,000.00 |
67% |
30,150.00 |
7,650.00 |
| Total/Average |
300,000.00 |
66% |
199,340.00 |
300,000.00 |
67% |
201,000.00 |
1,660.00 |
As an illustration of how this type of analysis might work for more complex applications, consider the following two recent case studies we completed:
- An FY 2014 consortium application included 35 FRNs with total discounts requested of over $3.5 million. The weighted-average discount on these requests was 66%, whereas the average discount for all the members was 67%. Although some FRNs went up in value, others went down. The total discount on a pro forma basis was up $70 thousand. If discounts are properly distributed, all members should gain a little. Filing a single application again for FY 2015 appears to be a reasonable strategy.
- An FY 2014 consortium application included 95 FRNs with total discounts requested of over $2.7 million. The weighted-average discount on these requests was 49%, exactly the same as the average discount for all the members. As a result, the total requested discounts, both actual and pro forma, were about the same. Because of a rounding difference, the pro forma total was down $20 thousand. That’s not too bad a result, but…
As an alternative, the pro forma application was split in two, one for FRNs with FY 2014 discounts of 40% or less, and one for the remaining higher-discount FRNs. The pro forma total funding request of the two separate applications was up $235 thousand. The best strategy for FY 2015, in this case, appears to be to file two (or more) applications.
Our preliminary conclusions on the impact of the new discount rate restriction on consortium applications are:
- The use of a single average consortium discount rate has no direct impact on a single-FRN application — except to the extent that the average consortium discount itself may go up or down because of other E-Rate 2.0 changes in the way individual member discounts are calculated.
- The use of a single average discount on a multi-FRN consortium application can raise or lower the total discount amount of the application (as compared to the previous method permitting different discounts for different member subgroups). Assuming the proper distribution of total discounts, these increases or decreases will be shared proportionately by all members.
- A consortium applicant, previously filing a single application with different discount rates for different FRNs, may be able to increase — or at least avoid decreases — in total discounts by filing two or more applications. However, there is likely to be a trade-off between discount optimization and filing complexity.