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Wednesday, July 17, 2013

E-Rate 2.0 Plan B

[I've edited this post based on updated information.  New info is in green; incorrect info is struck through.]

This was already a big week for the E-Rate, what with Congressional hearings today and the FCC scheduled to release a major NPRM tomorrow.  [For the benefit of those of you who have real jobs and therefore don't know what an NPRM is, when the FCC is planning to change a rule, they release a Notice of Proposed Rulemaking in order to give the public the opportunity to comment.  By the way, how is "RM" the acronym for "Rulemaking"?  My suspicion: Republican Commissioners didn't want any part of something called "NPR."]

In addition to all that excitement, yesterday FCC Commissioner Ajit Pai gave a speech at the American Enterprise Institute, in which he laid out his vision for the E-Rate program.  Not only did I get the full text of the speech, I got a nice summary, too.  In general, he's got some good ideas, and the Commissioner said, "E-Rate is a program worth fighting for," so all in all, a good speech.

But first, I have to get this off my chest: Commissioner Pai makes it clear that he has no love for E-Rate consultants. "[P]arents want funding to be spent on the classroom, not on consultants."  I can't argue with that, and I agree that the program should be simpler and more transparent.  But he slams consultants falsely in two ways.
  1. "Now, there are sure to be some who will be skeptical of a student-centered E-Rate program. Consultants may fear lost business if the paperwork and the labyrinth of rules disappear."  Show me those consultants.  Read back through this blog and see how often I advocate simplicity and transparency.  At our E-mpa® meetings, we bemoan every new complexity and advocate for simplicity and transparency.  And hey, Commissioner Pai, your "student-centric" E-Rate proposals are mostly a rebranding of ideas created by Funds for Learning and yours truly.  As a group (or "cottage industry," as Commissioner Pai calls us), consultants are advocates for simplifying and improving the program.
  2. "[A] consultant hired and paid Houston school employees to work on a variety of projects, all contingent on the consultant successfully winning E-Rate-funded contracts.... The consultant allegedly offered more than $60,000 in loans to decision-makers in the district and entertained them in luxury suites at sporting events and with tickets to the Super Bowl."  Isn't this the 2002 problem that resulted in a 2010 settlement?  Yup, here it is on page 29 of an FCC OIG report.  So all the wrongdoing above involved school district employees and service providers, not consultants.  Maybe I'm being over-sensitive, since the Commissioner didn't say "E-Rate consultants," but every other time he uses the word "consultant," he means "E-Rate consultant."
So while I share Commissioner Pai's disappointment at the program's complexity, and the abuses that have taken place, I take exception to the implication that those problems are the fault of consultants.  As a whole, consultants are a force for good in this program.  Remember back in 2009 when the GAO asked applicants were surveyed on who the best source of E-Rate information?  79% said consultants.  And only 25% of applicants were using consultants, so the majority of applicants not paying a consultant said consultants were a good source of info.  We ranked better than USAC or state E-Rate coordinators or the FCC.

OK, now onto the important stuff.

Commissioner Pai starts out (after plugging a number of companies including ITT Tech) by laying out the structural problem he wants to address.  And just to show where this consultant's priorities are, I'll list the year in which I first addressed those same issues in this blog:
  1. Delay: the application process takes too long.  2007
  2. Paperwork: the application process is too complex.  2006
  3. Outsourcing: applicants waste money on consultants to manage the application process.  2005
  4. Bad priorities: the funding should go to wiring, not phones, and to less-densely-populated states. 2013
  5. Bad incentives: 90% is too close to free, and unlimited funding requests are bad. 2005
I think the commish should have listed "lack of transparency" as its own problem, instead of just putting it as a sort of sub-complaint under #5.  To me, the lack of transparency is a bigger problem than #1 and #2.
Now on to the Commissioner's four-step solution:
  1. Allocate funding on a per-student basis, with some weighting for rural and poor students.
  2. Fund "next-generation technologies that directly benefit students."  Don't fund phones, non-instructional facilities.  Get rid of Priority One/Priority Two.
  3. Simplify the E-Rate application process.  A one-page application and one other form to "report back how they spend the money."
  4. Add accountability and transparency. Lower the top discount rate to 75%. Make the discount rate 75% for all applicants.  Post online info on exactly how the money is spent.
And my thoughts on those proposals:
  1. I given my thoughts on FFL's per-student cap proposal; a cap is a lot more complicated than it looks at first glance.  His example has caps of $128 for a student in WV and $32 for a student in NYC.  Two red lights there.  First, while WAN connections are probably more expensive to WV schools, NYC schools will pay something like 5-8 times more for internal connections so I'm not sure it's fair that the WV schools gets so much more.  Second, he mentions that the student is in a "tony" part of NYC; does that mean that the per-student cap is not going to be set on a district-wide basis?  So much for simplicity.
  2. I agree with the concrete suggestions, but not the rhetoric. The first paragraph in this section says, "redirect spending away from outdated services and toward next-generation technologies..." while the second says, "Different schools face different circumstances, so letting each choose where to spend E-Rate funds...will stretch limited dollars and will have the biggest impact on students."  So I guess it's good to let local districts spend the money however they see fit, but only as long as they see fit to spend it on the technologies that the FCC finds "next-generation."  
  3. I've already suggested that the application could just be a list of service providers and account numbers.  And for smaller applicants, just let them list total pre-discount spending.  Discount calculations based on census data?  That actually makes a lot of sense for libraries, but not so much for private schools.  For public schools, I would think NSLP numbers would be a better indicator of student income levels.  One unmentioned consequence of the Commissioner's suggestion: competitive bidding would no longer be part of the E-Rate process.  I've already said that the FCC should get out of the business of regulating the purchasing practices of local school boards.
  4. I'm all for lowering the top discount rate to 75%.  Though I have to say, if we're only going to have one discount rate, can we make it 65%, like over at Rural Healthcare? The certification that "E-Rate funds will be used to benefit students."  All schools have boards whose job is to make sure all funds are used to benefit students.  I like the idea of publicly posting detailed information on how the money was spent.
Next the Commissioner lists the positive outcomes.  Here are those outcomes with my comments:
  1. The simpler process will encourage more applicants to apply, and decrease reliance on consultants.  Both would happen, and both are positive for the program.
  2. Local school districts would be empowered to focus on student needs.  True, as long as the local boards don't think students need services that the FCC finds aren't "next-generation" enough.
  3. More careful spending.  I agree that cutting the top discount rate will restrain spending.  And if NYC gets $32/student, that will certainly force them to restrict spending.  But I'll wager that for many schools in WV, $128/student would be a spending increase.
  4. A fairer distribution of funding.  Let's ask those tony NYC parents if they think it's fair that their children will get $6.40 in E-Rate funding ($32 x 20% discount) $24 in E-Rate funding ($32 x 75% discount) while students in WV are getting $96 ($128 x 75% discount).  Fair is in the eye of the beholder.
  5. Sunshine and transparency.  Hear, hear.  I am all in favor of transparency.  But I think transparency should be part of the proposal, not in the list of benefits.  Transparency will require FCC action, like publishing the 700 pages of secret rules.
And here are a few other comments.

The commish creates a new (at least to me) term: "the red-tape funding gap."  He correctly points out that E-Rate disbursements are around $400 million lower than the cap each year.  But he incorrectly attributes it to administrative delays caused by applicant mistakes.  It's actually caused mostly by applicants over-estimating their needs, because their staff made fewer phone calls; or they had to apply for the same funding in two funding years, because the denial threshold for the current year wasn't set before the filing window for next year; or whatever.  It also used to be caused by applicants finding more cost-effective solutions mid-year, but the FCC's heinous SPIN change rules put an an end to that.  It's rarely due to an applicant mistake.

The commish only seems to want to exclude "stand-alone telephone service."  Please don't tell me that bundled telephone service would still be eligible.  We've had enough bundling trouble lately.

Saying that "an application for E-Rate funds can take a year to complete" is a serious understatement.  Even without any delays, appeals, etc., the process normally takes us longer than two years.  By September, we're already working on collecting info for the following funding year, while still completing BEARs for the previous funding year and 486es for the current funding year.  It's impossible to get from filing the Form 470 to receipt of all funding in less than 18 months, at least for monthly bills.  For Priority Two projects, I advise my clients to apply for funding 18 months before implementation, and be prepared for it to take 30 months.

The proposed cap system sort of double-counts poverty.  Because poor students get a higher per-student cap and schools with a high proportion of low-income students get a higher discount.  So a student from a family that makes $60,000/year in a school with similar families might get $16.80 ($42 x 40% discount), while a kid in the next town where families make around $40,000/year would get $63 ($84 x 75% discount).  That seems unfair, but there's an interesting idea in there.  By adjusting the pre-discount per-student cap, you could compensate low-income districts for the funding lost to a lower top discount level.  By creating two matrices, one for discount level, the other for per-student funding, you could get the benefits of lowering the discount level without lowering the amount of funding that low-income districts receive.  So much for simplicity.

In a couple of places, it seems that the Commissioner envisions a process where applicants file a (one-page) application, then get the funding, then later report on where that funding went.  I like the idea in principle, but in practice I'm afraid that when the report is filed, USAC will decide that some of the funding was spent on items not on the "next-generation" list, and will take some funding back.  And what will happen to responsible local boards who decide they don't need to spend so much money on next-generation services?

Commissioner Pai mentions that he wants the program improved by September 2014.  I'm all for expeditious change, but in the case of such drastic change, I would ask the Commissioner consider multi-year contracts.  Applicants got into multi-year deals based on one set of rules, and it could be ruinous to pull the rug out from under them in 3 months.

So I salute Commissioner Pai for adding his voice to the dialog, and I like many of his ideas.  But as always, the devil is in the details, and we don't have any details.

Most importantly, the commish consistently capitalized the "R" in "E-Rate."  The Big R is gaining steam.


  1. I have learned that I misunderstood some of Commissioner Pai's proposal, so I've changed the blog post somewhat. Those of you who are reading the blog in your email should check the updated version online:

    Commissioner Pai is actually talking about getting rid of the discount matrix, and having every applicant get a 75% discount. It's an interesting idea, to have the discount rate flat, while weighting the total funding amount in favor of rural and low-income schools.

    And I've learned that Commissioner Pai is suggesting no more FCC regulation of local school district purchasing. The application would not mention service providers at all. Oh yeah!

  2. I was just thinking about Commissioner Pai's view of consultants as one of the five main problems with the E-Rate, and it occurred to me: how many lawyers' days are completely filled with FCC issues? The cost of E-Rate consultants pales in comparison to the legal fees for the FCC's other activities.

    Not that I'm defensive or anything.