News of the Week

Funding Status

Wave 31 for FY 2014 will be released on Wednesday, December 10th. 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 $2.10 billion.

Wave 76 for FY 2013 will be released Thursday, December 11th.  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 $2.13 billion.

Wave 98 for FY 2012 will be released on Tuesday, December 9th. 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 4

This is the fourth in a four-part series of articles 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

To this point in the series, we have focused on applications for Category 2 funding within a single funding year. Category 2 budgets, however, are set on a rolling five-year budget cycle. Within that period, an applicant could file for up to its five-year pre-discount cap — $150 per student for schools or $2.30 per square foot for libraries — in a single year or spread out over any of the five years. As a simple example, consider a school with 200 students whose five-year pre-discount Category 2 budget is 200 x $150 = $30,000. That budget could be fully utilized in any — or more — of the following ways:
Case 1:      $30,000 Wi-Fi installation project in Year 1.
Case 2:      $20,000 Wi-Fi installation project in Year 1 (with 3-year warranty), plus $5,000 per year for maintenance in Years 4–5.
Case 3:      $6,000 per year managed W-Fi service for Years 1–5.

When considering use of the Category 2 budget over a five year period, the two most important factors to take into account are: (a) the possibility of Category 2 budget changes over the period, and/or (b) the availability of Category 2 funding at the applicant’s discount rate in all funding years. An additional issue involving the administration of basic maintenance expenses must also be addressed.

Possible Annual Budget Changes:

Year-to-year Category 2 budget changes are more likely to affect schools, whose budgets are based on annual student enrollment, than they are to affect libraries, whose budgets would change only with increases or decreases in physical space.

Using the base 200-student school example above, here’s what would happen if an existing school’s enrollment either rose to 220 students, or dropped to 180 students, in Years 2–5:

It is important to note that the analysis above applies to budget changes for an existing school. A new school applying for Category 2 funding, whose budget is based on an estimated student enrollment, will be held retroactively responsible for an enrollment shortfall. If, for example, the enrollment for a new school was originally estimated at 200 students for Year 1, but the actual enrollment ended up as 150 students, the five-year budget would drop from $30,000 to $22,500. If the original $30,000 budget was fully utilized in Year 1 (as in Case 1), the school would have to refund the discounted portion of the $7,500 budget shortfall to USAC.

Note also that an applicant’s change in discount rate over the five-year period, while not necessarily affecting the five-year pre-discount Category 2 budget cap, would affect the applicant’s non-discount share.

Annual Funding Availability:

One strategic Category 2 budgeting issue being addressed by some applicants is the trade-off between attempting to use all or most of their five-year budget to do a major installation/upgrade in one year, or to spread out the use of that budget over all five years. In many cases, the determining factor in this decision is the probability of receiving Category 2 funding in any or all years of the five-year cycle. This, in turn, depends on the overall expected supply and demand for Category 2 funding in any given year.

Under the current E-rate modernization Order, the FCC has “targeted,” but not guaranteed, $1 billion in Category 2 funding in both FY 2015 and FY 2016. It has also indicated that it expects to have an equivalent amount of Category 2 funding available annually over the following three years. Estimates provided by the FCC suggest that $5 billion will be sufficient to fund the Category 2 budget needs of all applicants over five years. Even if these estimates are correct, however, it does not mean that funding will be sufficient to fully meet applicant needs in any given funding year — most specifically in FY 2015 following two years of no Priority 2 funding at all (and limited funding in prior years).

If full Category 2 funding for all applicants in FY 2015 (or subsequent years) is not sufficient, the funding that is available will be allotted first to the highest discount applicants (those at the Category 2 maximum of 85%), then progressively to those at lower discount rates. This is the same process as was used previously to allocate limited Priority 2 funding. The twist, going forward, is that if some, but not all, funding is available to meet the demand of applicants at a given discount rate, it will be progressively rationed to applicants at that discount rate based on their actual NSLP percentages. If the cutoff discount rate was at 80%, for example, those applicants would have NSLP percentages ranging from 50% to 74%. In this case, applicants at 74% would get funded first, then those at 73%, and so on, until the remaining Category 2 funds were depleted.

At the current Category 2 funding target of $1 billion a year, low- to mid-level discount rate applicants may not be funded, at least for the first year or two. Their prospects may be improved, but still not assured, if FCC Chairman Wheeler’s proposal to increase E-rate funding by $1.5 billion a year (see our newsletter of November 24, 2014) is approved at this week’s Commission meeting. The increase in E-rate funding is tied to other proposals designed to provide greater support for Category 1 broadband services that, if approved, are likely to come too late to significantly increase Category 1 demand for FY 2015, thus making more funding available for Category 2 next year.

Even if more funding becomes available for Category 2, it is still important for low- to mid-level discount rate applicants in particular to consider strategies for dealing with annual funding limits. Here are a few thoughts:

1. Recognize, from a budgeting perspective, that Category 2 funding to support ongoing expenses such as maintenance or managed Wi-Fi services may not be available in all years. When considering a commercial alternative for such services, as opposed to using school employees, the most conservative approach is to make that decision based on cost-effectiveness independent of E-rate.
2. Planning to use all, or almost all, of a school’s five-year Category 2 budget on major purchases in a single year makes sense if there is some flexibility on the year in which such a project can be scheduled. If the project must be done in FY 2015, for example, there is little option other than to apply for discounts in that year and hope for E-rate funding approval. If the project could be done at any time over the next few years, there is a greater likelihood of funding in at least one of those years. In that case, the strategy is to request funding each year, based on a contract contingent on E-rate funding, and to do the project only when funded.
3. If a major system installation or upgrade is needed in a specific year, consider including contractual options to pay for the project upfront, if funded in that year by E-rate, or to spread out the project payments over several years through some form of capital or operating lease. Under the previous Priority 2 rules, leasing made little sense because; (a) the finance charge component of leasing was not eligible (and still is not); but (b), and more importantly, the 2-in-5 rule limited discounts to at most two years. Under the new Category 2 rules (as far as we know), it is possible to use a lease to amortize project costs over a period of up to five years in anticipation of receiving E-rate funding for at least some years.

Basic Maintenance and Managed Services:

Basic maintenance of internal connections equipment is eligible largely on a break-fix basis. In the past, this meant applying for discounts on an estimated level of maintenance across a wide range of eligible equipment, often spread over multiple schools. Typically, total maintenance costs were estimated as some percentage of the underlying equipment costs. Over the course of the year, some equipment might break requiring major repairs well in excess of the estimate percentage. Other equipment might need no maintenance at all. The trick was to determine average eligible maintenance costs.

The new Form 471 appears to call for the listing of maintenance expense estimates on a line-by-line basis, with specific allocations per school. If these estimates become fixed ceilings on individual line item repairs, we would expect some approved maintenance expenses to be grossly insufficient, while others would go unused. Clearly — at least we hope — this is not the FCC’s intent. What would be required is a means to reallocate maintenance funding within eligible equipment types, modifying ongoing school budget utilizations accordingly. This assumes a USAC Category 2 budget tracking tool, and associated procedures, on a per school basis — a requirement needed in any event to follow, and make changes in, Category 2 school (or library) budgets across multiple applications and funding years.

Another way to handle internal broadband maintenance — at least potentially — is to incorporate some or all of that maintenance within the new Managed Internal Broadband Services category. The definition of managed services in the ESL for FY 2015 (page 6) references the management and operation of the LAN/WLAN. Managed “operation” of equipment would appear to imply maintenance thereof. Indeed, Slide 16 in USAC’s fall applicant training on the Eligible Services List specifically noted that “Many of the services ineligible under BMIC [Basic Maintenance of Internal Connections] are eligible as Managed Internal Broadband Services.”

Although additional clarification from USAC and the FCC may be required, it appears that fixed-priced managed broadband services, allocated on a per school or per library basis, may be a way to avoid some of the basic maintenance complications outlined at the beginning of this subsection.

E-Rate Updates and Reminders

FCC Appeal Decisions Watch:

The FCC issued one decision (DA 14-1732) last week granting a request by the Puerto Rico Department of Education (“PRDE”) seeking a waiver of the FCC’s “then-existing rules requiring E-rate applicants to have a signed contract in place prior to filing an application for E-rate support.”  The reference to “then-existing rules” reflects the rule change under the E-rate modernization Order no longer requiring a signed contract if there is a “legally binding agreement.”

In this case, PRDE had agreed to extend an existing contract, but its ability to formalize that renewal  “was complicated by an executive order signed by [the Governor]…only 60 days before the close of the E-rate funding window…prohibiting any department…from awarding contracts without the written authorization of the Puerto Rico Secretariat of Governance.”  The FCC’s decision to waive the formal contract signature requirement appears consistent with its new legally binding agreement requirement.

In this regard — and quite apart from the Puerto Rico decision — we warn applicants about relying on a legally binding agreement in the absence of a signature. To be considered “legally binding,” an agreement must meet the enforceable contract standards of the applicant’s resident state. USAC’s example of an unsigned legally binding agreement, such as a confirming email, may not meet many state standards. We continue to urge applicants to obtain signed contracts (even if contingent on more formal documents to be executed).

USAC E-Rate Webinars:

USAC has scheduled a series of six instructional webinars on E-rate topics over the next five weeks beginning December 9th. The schedule and registration links are shown below. All webinars will be at 3:00 p.m. EST.

We expect USAC to add at least one additional webinar demonstrating the new Form 471 as early as possible in January.

Senator Rockefeller’s Farewell Address:

Senator Jay Rockefeller (D-WV) is retiring at the end of this term having served in the Senate since 1985. He, together with former Senator Olympia Snowe (D-ME) (who retired last year) and now Senator Edward Markey (D-MA) (formerly a House representative), were key architects of the E-rate program incorporated in the Telecommunications Act of 1996.

On the Senate floor last week, Senator Rockefeller delivered a farewell address that is worth reading or viewing. Although the address speaks little about E-rate, it speaks volumes about the man. He is, to use one of my mother’s highest accolades, a “Classy Guy.”  Senator Rockefeller’s ongoing support for the E-rate program will be sorely missed.

Schools and Libraries News Brief Dated December 5 – Invoicing Update and Form 470

The S&L News Brief for December 5, 2014 includes a notification that the new rules on invoice deadline extensions, originally set to become effective October 28, 2014, under last July’s E-rate modernization Order, will not actually become effective until December 18th. The delay in the effective date is the result of later issued errata. This change will provide some relief for those who missed the original deadline to request an extension — provided they act quickly,

The following two invoice extension issues, not mentioned in last week’s News Brief, should be noted:

1. Many applicants who applied for invoice extensions prior to October 28, 2014, have still not been notified that their “automatic” extensions have been granted. In a conference call with service providers last week, USAC indicated that it had received over 13,000 requests in late October and was still working its way through the backlog. Although FCC rules require USAC to receive and grant extensions before processing late invoices, one possible solution might be for the FCC to permit USAC to treat qualifying late-filed invoices as de facto requests for extensions, thus avoiding an extra step for both applicants and USAC.
2. Invoices received by the initial deadline, but subsequently rejected after the deadline by USAC, currently require invoice deadline extensions that, under current rules, require FCC waivers. A more sensible approach would be to allow USAC to grant short extensions — say 30 days — to allow corrections. We understand that such an approach is under discussion and hopefully will be announced shortly.

Another subject covered in last week’s News Brief concerned the filing of Form 470s. Note also the USAC webinar on the Form 470 scheduled for this week and referenced above. Form 470 topics in the News Brief included:

1. The dos and don’ts of filing a Form 470.
2. The 28-day posting requirement.
3. Coordinating the filing of a Form 470 with the issuance of an RFP.
4. The need for Form 470s in connection with existing contracts.
5. Posting for services that do not require a Form 470.

The final point references two competitive bidding exemptions (and thus Form 470 posting requirements) included in the E-rate modernization Order. One involves the use of nationwide Preferred Master Contracts that the FCC is authorized to issue for Category 2 equipment. We understand that the FCC has no plans to issue Preferred Master Contracts for FY 2015 use, so this is currently a moot issue. Should the FCC do so in the future, we shall express our concerns with respect to state procurement requirements.

The other exemption is for “commercially available business-class Internet service” subject to per school price restrictions ($3,600 per year) and minimum speed requirements (100 Mbps downstream and 10 Mbps upstream). We warn applicants relying on this competitive bidding exemption that, should USAC ultimately find that the service did not meet the exact requirements specified (such as “commercially available”), they might not be able to fall back on valid Form 470s and, as such, their discount requests could be denied.

We recommend that applicants continue to rely on Form 470s for all E-rate eligible services.