News of the Week

Funding Status

Wave 28 for FY 2014 will be released on Wednesday, November 19th. Funding for FY 2014 is available for Priority 1 services only. Priority 2 funding is being denied at all discount levels. Cumulative funding for FY 2014 is $2.08 billion.

Wave 74 for FY 2013 will be released on Thursday, November 20th. Funding for FY 2013 is available for Priority 1 services only. Priority 2 funding is being denied at all discount levels. Cumulative funding for FY 2013 is $2.12 billion.

Wave 96 for FY 2012 will be released on Tuesday, November 18th. Funding for FY 2012 is available for Priority 2 funding requests at 90 percent and denied at 89 percent and below. Cumulative funding for FY 2012 is $2.86 billion.

E-Rate Modernization – Category Two Budget Strategies, Part 2

Last week’s newsletter began a four-part series of articles on Category 2 budget strategies. Given what is known and unknown about the Category 2 funding rules and procedures, we noted that our objective is to explore how a Category 2 application (or applications) could or should be structured for maximum funding and flexibility.

In Part 2 of this series, we examine possible funding application strategies for a single large project for an individual school or library. The next two parts in the series will focus on multi-entity and multi-year applications.

Over-Budget Category 2 Projects:

A Category 2 application for an individual school or library in FY 2015 should be relatively straight-forward — as long as the total amount of the funding request(s) is no more than the maximum five-year Category 2 budget. To be sure, the new version of the Form 471 will require substantially more data, particularly in the newly embedded Item 21 fields, but no budgeting strategies are required (at least for that year).

The problem is that a major Category 2 equipment and installation budget, such as might be required for a new school or for a major upgrade of an existing school, may exceed the five-year pre-discount budget cap on eligible equipment of $150 per student for a school or $2.30 per square foot for a library.

To understand the problem, consider the following example. Assume a school of 200 students is planning to install a wireless LAN system. Its five-year pre-discount E-rate budget, at $150 per student, is $30,000. But its proposed and detailed bill of labor and materials might look as follows:

Previously, an applicant seeking funding for this project would file a Block 5 FRN for the entire pre-discount cost of $34,475 and might append the bill of labor and materials as the Item 21 attachment. If the FRN was approved, the applicant would know that USAC had reviewed the eligibility of each of the line items, and presumably would ultimately approve invoices itemizing the same equipment and services.

For FY 2015, however, the situation has changed. Item 21 information must now be included in the Form 471 application itself on a line-by-line basis (as shown below in the draft version of the new Form 471).

What makes the FY 2015 application difficult under this example is that the total cost of the project — involving all eligible items — exceeds the maximum E-rate budget by $4,475. This raises two interesting questions, namely:

1. Should the applicant list all eligible items in the Block 5 even though the total exceeds their maximum E-rate budget?
2. Assuming that the online Form 471 system allows a request to exceed the budget (which appears to be the case), if the applicant lists all of the eligible items, how will the funding commitment be structured to limit funding to the maximum budget?

At the moment, answers to these questions are not clear. Early guidance from USAC during its fall training workshops was that an applicant should limit its funding request to the maximum budget. The implication of this guidance was that an applicant can submit an over-budget request, but that doing so will complicate and delay the funding decision.

Our view on this is that there are two ways that USAC could deal with over-budget Category 2 funding requests (whether on a single application or on multiple applications involving the same school). One way or another, USAC will have to deal with this issue. At least on a single application, USAC could:

1. Review the entire request for eligibility purposes, but approve funding only at the maximum budget amount; or
2. Review and approve individual line items totaling no more than the maximum budget amount.

Option 1 might require more work for USAC to make sure that all line items are eligible, but it would provide greater flexibility for an applicant in the event that:  (a) certain components were deemed ineligible; (b) service substitutions were made in the future; or (c) the project was scaled back during the funding year.

Option 2 raises the issue as to who — USAC or the applicant — decides which line items to fund. Might USAC simply review line items sequentially, as presented, and cut off any items over budget?  If so, in the example above, the last item would be ignored. This would mean that funding would be provided only on the remaining pre-discount total of $26,575, not on the full budgeted amount.

Our concern is not just with the application and review process, but with the ultimate invoicing process. As the project is completed, actual component quantities and/or installation prices may vary from initial estimates. More or less cabling or wireless access points, for example, may be required. Ideally, USAC’s funding commitment, while limited to the budget cap, would acknowledge the project eligibility on a line-by-line basis — i.e., Option 1.

If Option 1 will prevail, it would be nice to know that before the Form 471 application window opens. For planning purposes in the interim, however, it may be useful to consider how line items and quantities might be structured and/or changed to avoid potential Option 2 problems. For strategic purposes, our suggestion is to add a cumulative expense column to the project price list, and to re-order the line items, to optimize maximum budget coverage. One revised version of our example is provided below, nicely reaching the $30,000 budget total using only five of the eleven initial line items.

The drawback of this approach, assuming that USAC simply ignores the last six line items, is that costs for the other eligible, but unapproved, items would not be covered if the final invoice total on the first five line items turns out to be less than $30,000 cap.

Another approach might be to reduce the quantities of one or more line items — the first line in the following example — to bring the total pre-discount cost within budget. This would have the advantage of assuring USAC review and approval of all items should minor changes be required post-commitment.

The choice of a final application strategy for over-budget projects will depend upon what we learn (or hopefully learn) over the next few months about prospective USAC review and commitment procedures for FY 2015 Category 2 applications. But it is not too early to begin assessing the alternatives.

Impact of Effective Discount Rates:

Because Category 2 budgets are calculated on a pre-discount basis, the example above was constructed without regard to any specific applicant’s discount rate. From an applicant’s budget standpoint, however, the post-discount cost of a project that exceeds the Category 2 limit should be recognized. This type of analysis has always applied to ineligible services. But under the new Category 2 rules, excessive cost for otherwise eligible services will affect an applicant’s effective E-rate discount percentage.

Under the old priority system, for example, an applicant with an 85% discount rate would only be responsible for the 15% non-discounted portion. Under the new rules, the effective discount rate will be significantly less if the total cost of the project exceeds the budget cap. As the chart below shows, the applicant’s effective discount under the example discussed above would drop to approximately 74%. As applicants plan for projects under the new budgetary model, ensuring they have adequate matching funds will be a vital part of the planning process.

E-Rate Updates and Reminders

E-Rate and Net Neutrality:

Net neutrality, a long simmering policy issue before the FCC, has been much in the news the last two weeks following a public call by President Obama for tougher regulations on high-speed Internet providers. It’s a sensitive issue that may indirectly affect E-rate funding.

To understand net neutrality, it is important to recognize that certain Internet activities — most specifically video — require much greater bandwidth than other applications. To Internet service providers (“ISPs”), that bandwidth is expensive. So one key question is: should the ISPs charge everyone the same price for access to the Internet, as is largely the case today, or can they charge more for high bandwidth content providers?  The ISPs argue, as do some economists, that net neutrality — i.e., equal prices for services, regardless of the underlying costs of such services — is inherently unfair and inefficient. Content providers, and many Internet users, disagree. And it’s a hot issue. During the latest call for public comment, the FCC received 3.7 million replies, most favoring net neutrality.

The FCC, which has been trying to decide this issue for a number of years, has a problem. Under current laws, it has only two basic regulatory options: to treat the ISPs as regulated telecommunications carriers under Title II of the Telecommunications Act of 1996, or as less regulated information service providers under section 706 of the Act. A previous FCC proposal on the issue was overturned by the courts. FCC Chairman Wheeler is floating a compromise proposal that is now at odds with the President’s call for strict net neutrality regulation. Republicans lean the other way, immediately dismissing Obama’s plan as “last century’s rules.”

Whatever the FCC decides, Congress may undertake a more serious effort, as has been proposed in recent years, to revise the Telecommunications Act of 1996. Doing so would undoubtedly involve more issues than net neutrality, perhaps including E-rate. Most specifically, there is a concern that a partisan fight over net neutrality would lead Congress to withhold FCC funding on lower-profile issues such as an increase in the E-rate funding cap. Earlier this year, as additional funding for E-rate was being considered, one view was that such a move would be unlikely until after the November elections. Post-election, the new question is whether or not additional E-rate funding would be considered while the net neutrality battle rages?

Schools and Libraries News Brief Dated November 14 – Form 486s and Entity Numbers

The S&L News Brief for November 14, 2014 provides additional information on two topics.

Form 486 Deadline Reminder:

As discussed in our newsletter of October 20, 2014, the first major deadline for filing FY 2014 Form 486s for recurring services funded in Waves 1–7 was October 29th. Now, several weeks later, the normal Form 486 deadline has passed for recurring services funded in Waves 1–10. An updated table of the next Form 486 deadlines for the remainder of the year is shown below.

                                          Wave 11                11/20/2014
                                          Wave 12                11/28/2014
                                          Wave 13                12/04/2014
                                          Wave 14                12/11/2014
                                          Wave 15                12/18/2014
                                          Wave 16                12/26/2014

Fortunately, for those missing Form 486 deadlines, USAC procedures provide a second chance. As noted in the latest News Brief, USAC will be mailing Form 486 Urgent Reminder Letters on November 19th to over 1,400 applicants who missed the Form 486 deadline for Waves 1–9. These applicants will be given until December 9th to file their missing Form 486s without penalty. We expect another batch of Urgent Reminder Letters for later waves to be sent in December.

More on Entity Numbers:

This News Brief also continues a discussion of entity numbers begun in the S&L News Brief for October 31, 2014. The additional topics covered deal with entity numbers for:

• Buildings located on the same campus
• A single school (as defined by the state) with multiple locations
• School or library buildings under construction
• Non-instructional facilities (“NIFs”)