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Round-Up for the Week of August 19-23, 2024

In May 2023, Senator Ted Cruz (R-TX), the minority leader of the Senate Commerce Committee, sent a letter to the U.S. Government Accountability Office (GAO) requesting an examination of how the Federal Communications Commission administers the Universal Service Fund (USF). The USF consists of money collected from telecommunications companies that is dedicated to fulfilling the goals of universal service. On August 22, the GAO published its findings that USAC's processes for managing its operating budget and expenditures align with selected FCC requirements. We delve into some of the details below.

In 1998, the FCC created the Universal Service Administrative Company (USAC), a private non-profit charged with the administration of the USF. USAC administers the collection of USF contributions and administers the disbursement of USF money through four USF programs: High Cost, E-Rate, Lifeline, and Rural Health Care. Contributors, beneficiaries, USAC, and the federal government share the task of ensuring that universal service money is handled properly from start to finish. Through program administration, auditing, and outreach, USAC works with and for contributors, service providers, and program beneficiaries to ensure that accurate payments go to the right people for the appropriate uses.

USAC is primarily funded—if you're scoring at home—by the USF, which are federal resources held by the U.S. Treasury. In 1996, Congress authorized the USF as a permanent, indefinite appropriation (i.e., appropriations that, at the time of enactment, are for an unspecified amount and that remain available without further congressional action). By statute, carriers providing interstate telecommunications services must contribute to the USF unless exempted by FCC.

Each quarter, FCC calculates a contribution factor based on the needs of USF programs and assesses it as a percentage of the carriers’ interstate and international end-user telecommunications revenue. The carriers generally pass these costs on to customers, and the costs may be a line-item expense on customers’ bills. The FCC does not assess revenues from the provision of broadband service for contributions to the fund. Annual disbursements from USF contributions have remained fairly stable from 2018 through 2023, at about $8 billion per year. 

The Cruz Request

In his 2023 letter, Sen. Cruz focused on the FCC's creation of USAC. As a not-for-profit, private corporation, USAC is not part of FCC or any other federal entity. Therefore, certain federal requirements and standards do not explicitly apply to USAC. USAC, however, is subject to requirements established by FCC through regulations, orders, and the two parties’ memorandum of understanding (MOUs). These requirements reflect some of the provisions and practices applicable to government entities. 

Sen. Cruz raised three concerns about USAC:

First, USAC’s role has shielded the FCC from accountability for skyrocketing USF fees.  

Second, USAC’s transparency, and too little oversight of USAC’s ever-increasing overhead costs. 

Third, USAC has a history of poor performance. 

Sen. Cruz asked GAO to examine the following questions and issues:

1. Does the FCC’s current designation of USAC as permanent USF administrator comply with federal law and best practices?
2. The FCC currently determines the quarterly contribution factor through a passive “deemed approved” process, without a Commission vote.  Does this process comply with best practices? 
3. The USAC budget and planning process.
4. USAC board appointment process.
5. Efforts to address waste, fraud, and abuse in USF and related programs.

The GAO Report

GAO reviewed statutes, regulations, FCC orders, and the relevant agreements between FCC and USAC. GAO also reviewed documents from 2018 through 2023 related to USAC's goals, budget and expenditures, and ethics program. In addition, GAO assessed USAC's policies against applicable FCC requirements identified in a MOU. GAO interviewed FCC officials, USAC executives, and three individuals serving currently or previously on USAC's Board. GAO selected these individuals to obtain diverse perspectives based on their experience, constituency, and role on USAC's Board.

GAO examined USAC's efforts to 1) establish and report on its goals in the last six years, 2) manage its operating budgets in accordance with selected FCC requirements, including recent trends in its expenditures, and 3) maintain an ethics policy consistent with FCC requirements.

1) USAC Goals

To examine USAC’s efforts to establish goals and monitor and report on progress in the last six years, GAO reviewed documentation related to USAC’s operational goals from calendar year 2018 through calendar year 2023—which are separate from FCC’s goals for the USF programs. GAO reviewed how USAC monitored and reported on its progress, including its plans related to the FCC’s four USF programs and other operational areas. 

FCC has provided direction and requirements regarding USAC’s administration of USF and other programs. According to USAC executives, USAC collaborated internally to annually develop its goals to meet requirements established by FCC. Specifically, USAC executives and their division leaders internally discussed USF program goals, staff resource plans, and any operational plans for the year. Based on these discussions, USAC established its goals for the year. After USAC shared its goals for the year with the FCC, the Commission provided feedback on the goals and USAC finalized its goals. Once approved, USAC used the goals to establish annual performance appraisal targets against which USAC measured staff performance twice a year. 

From 2018 through 2023, USAC developed goals that fell under four operational categories—improving operational effectiveness, strengthening the customer experience, monitoring and implementing internal controls, and maintaining a positive culture. To help track its progress, USAC developed 18-month plans, with FCC input, for its programs and operations.

2) USAC Budgets

To examine USAC’s efforts to manage its operating budget in accordance with selected FCC requirements and recent trends in expenditures, GAO reviewed documents, including USAC’s:

• filings with FCC related to USAC’s operating budget and USF programs;
• annual reports from 2018 through 2023;
• expenditure approval authority policy and processes;
• employee handbook; and
• compensation policy.

GAO also reviewed reports by independent auditors. GAO evaluated USAC’s policies and processes against ten requirements selected from the MOU related to USF programs. GAO also reviewed USAC’s operational expenditures from 2018 through 2023. In addition, GAO  summarized information on FCC’s reported process for determining the quarterly contribution factor.

USAC’s processes for managing its operating budget include:

1. setting an annual operating budget for administering USF programs,
2. reviewing and revising this budget on a quarterly basis, and
3. approving and reporting expenditures. 

Once USAC has internally approved its preliminary operating budget for the year, it submits this budget to FCC and USAC’s Board for review, feedback, and approval. USAC presents its preliminary annual budget to FCC’s Office of the Managing Director in December and incorporates any feedback into the final annual budget. In January of each year, USAC submits its final annual budget to FCC for review and feedback as part of the Board meeting materials. The Board’s committees review and approve portions of the operating budget that correspond with individual USF programs. Then the entire Board approves USAC’s total operating budget. The Board documents its approval in publicly available meeting minutes.

GAO finds that USAC’s processes for managing its operating budget and expenditures align with selected requirements established or identified by FCC in the MOU. Specifically:

• the USAC Board’s bylaws require that the Board oversees USAC’s business and affairs and that programmatic committees review USAC’s activities (e.g., developing and administering program application processes), among other things.
• USAC’s compensation policy cites the Board’s responsibility for reviewing the policies themselves, along with some of USAC’s decisions (e.g., USAC management’s recommendation for merit-based salary increases for USAC staff).
• USAC’s procurement policy and process narrative documents identify the Board’s role in approving award recommendations over $250,000. 

Additionally, the MOU requires, and USAC’s approval authority policy acknowledges, that USAC must seek FCC’s advance approval of certain procurements. Furthermore, the MOU requires USAC to provide a procurement report to FCC annually for all procurements from the prior fiscal year over a certain threshold. USAC’s practices align with this requirement. 

The FCC requires that USAC undergo several annual routine audits, including independent auditors’ reviews of the annual USF financial statement, and agreed-upon-procedures that test aspects of USAC’s governance and operational processes. In addition, USAC is part of FCC’s annual information security audit. FCC staff meets independently with auditors prior to, during, and after their reviews. USAC is also party to additional audits by independent auditors, FCC’s Office of Inspector General, and USAC’s own audit division. These audits may review issues related to USAC’s budget and expenditures.

3) USAC Ethics

To examine USAC’s ethics policies, GAO reviewed USAC’s documentation related to its ethics program, including policies and procedures. GAO interviewed FCC and Office of Government Ethics officials to help determine what, if any, federal ethics requirements apply to USAC. GAO assessed USAC’s ethics documentation against applicable requirements contained in the MOUs. GAO also interviewed a non-generalizable sample of individuals who have served on USAC’s Board to obtain their perspectives of directors’ roles and responsibilities. The individuals included one former and two current directors with a variety of roles and at least one year of Board experience.

USAC maintains a written ethics policy, provides the most recent copy to FCC, and notifies FCC in writing of any changes to the policy, consistent with requirements set by FCC in the MOU. USAC’s ethics policy is its Statement of Ethical Conduct and it maintains separate policies for its Board and for its employees. 

USAC has several requirements for its Board and employees. These include: 

• Acknowledging the ethics policy. USAC requires all employees to sign the policy each year. By contrast, a USAC executive told GAO that by agreeing to serve on the Board, directors acknowledged and accepted their responsibilities and agreed to comply with the provisions within the Board’s ethics policy.
• Completing ethics training. USAC requires the Board and its employees to complete annual ethics training, which emphasizes the importance of conducting USAC business in an ethical manner. USAC tracks completion in its learning management system using third-party software.
• Awarding contracts. The USAC Board and employees may not award any noncompetitive contracts to a USAC affiliate or to an entity with a representative serving on the USAC Board.
• Disclosing financial interests and potential conflicts. USAC requires the Board and its employees to annually disclose personal and familial financial interest in entities with which USAC has a relationship (e.g., USF beneficiaries or recipients, or a party to legal action against USAC). 

In addition, if a director has or may have a conflict of interest, USAC’s general counsel generally recommends directors recuse themselves from Board votes involving the conflicted matter. 

The representatives of USF contributors and beneficiaries who serve as directors on USAC’s Board are responsible both to their constituencies and to USAC, which can create the appearance of a conflict of interest. However, in a 1997 order to establish USAC, FCC explained its intent to create a Board comprising diverse participants representing a wide variety of industry and beneficiary interests, which would mean the Board should function, as a whole, in a competitively neutral and unbiased manner.

Directors ultimately must use their position to represent USAC’s overall interests. The Board policy also notes that directors bring to the attention of the Board the particular sensitivities and concerns of their constituency.  

USAC's Leadership

USAC carries out its administrator responsibilities under the oversight of a Board of Directors and the leadership of an executive team, headed by a chief executive officer. The executive team comprises a chief administrative officer, chief financial officer, chief information officer, general counsel, four USF programmatic vice presidents and two operational vice presidents. This team oversees USAC’s four USF program divisions and six others, including the Finance Division and the Audit and Assurance Division. 

USAC's CEO is Radha Sekar. Previously, Sekar served as the CFO for both the Farm Service Administration and the Commodity Credit Corporation of the U.S. Department of Agriculture, where she oversaw a $30 billion budget in borrowing authority and another credit portfolio of $40 billion. Sekar served as the Executive Associate Director for Management and Administration and the Chief Financial Officer for Immigration and Customs Enforcement at the U.S. Department of Homeland Security from 2010 to 2015. She also served as a Senior Advisor and Assistant to the Under Secretary of Defense at the U.S. Department of Defense (DoD) from 2007 to 2010. Sekar also worked at both IBM and PricewaterhouseCoopers, where she actively worked with government agencies, such as the DoD, to reconfigure and improve processes across departments. Ms. Sekar began her career in 1989, at Electronic Data Systems (now a part of HP) on the IT side of finance.

USAC’s Board comprises 20 individuals who serve 3-year terms, apart from a chief executive officer, who is a permanent Board member. FCC regulations govern both the Board’s composition and the selection of its directors. Directors’ constituencies include various industry and non-industry groups, but USAC’s policies state the Board’s primary responsibility is to advance USAC’s overall interests. Directors provide leadership and guidance for administrating the USF.

According to USAC’s bylaws, no director may receive compensation for service on the Board, but directors are entitled to reimbursement for expenses incurred as a direct result of Board participation. Under USAC policies, other key Board responsibilities include approving USAC’s operating budget, and certain procurements based on established dollar thresholds.

USAC Operating Expenses

USAC’s operating expenditures related to USF programs increased by 27.5 percent from 2018 through 2023. USAC attributed the increase to replacing obsolete legacy systems and strengthening program integrity. In addition, the share of USF outlays going to USAC’s operating expenditures increased from 2.2 percent to 3 percent from 2018 through 2023. Thus, USAC expended a larger share of USF outlays on its annual operations compared to two non-USF programs (the Emergency Connectivity Fund Program and the Affordable Connectivity Program) that were subject to a two-percent statutory cap.

Actions USAC took at the FCC’s direction increased operating expenditures for USF programs as a percentage of total annual USF outlays. For example, in 2016, the FCC directed USAC to implement improvements to the Lifeline program to combat waste, fraud, and abuse, including requiring a centralized process and data system to check applicants’ eligibility for Lifeline subsidies. To administer these changes, USAC incurred additional operating expenditures such as: increasing the number of staff working on the Lifeline program from 33 to 76; and with FCC approval, procuring an outside vendor to review Lifeline applications. Lifeline programmatic outlays decreased during this period as well, as these program improvements removed or prevented ineligible participants from enrolling. 

USF Court Proceeding

Last month, the U.S. Court of Appeals for the Fifth Circuit found the FCC's administration of the USF to be unconstitutional. In a somewhat complex (and puzzling) ruling, the court decided that:

1. Universal Service contributions made by telecommunications carriers constitute a tax not a fee (as earlier court decisions had found);
2. Congress impermissibly and unconstitutionally delegated its sole authority to tax to the FCC because Congress failed to give the FCC required “intelligible principle” to guide the FCC’s discretion;
3. The FCC impermissibly delegated its authority to USAC; and
4. Even if both delegations of authority were permissible, the combination of both delegations exceeds constitutional bounds. 

Because of recent court rulings that contradict the Fifth Circuit's decision, the case may well end up before the Supreme Court. The GAO report may be fodder for the Solicitor General of the US and the FCC as they consider filing for an appeal of the Fifth Circuit's ruling.

See Administration of Universal Service Programs Is Consistent with Selected FCC Requirements for more.

Quick Bits

• Federal Broadband Programs Could Add $146 Billion to GDP
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• Obama, the ‘internet president,’ makes his return
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Weekend Reads

• '24 Democratic Party Platform
• Chairwoman Rosenworcel's Response to Members of Congress Regarding the Supreme Court’s Decision on Loper Bright Enterprises v. Raimondo
• Broadband Construction Projects and Prevailing Wage in Minnesota

ICYMI from Benton

• Broadband Affordability is First and Foremost in Maine
• Illinois is Committed to Changing the Broadband Affordability Picture
• Arizona Aims to Make the "6th C" More Affordable
• How Maryland is Working to Make Broadband More Affordable
• Connecticut Working to Ensure Universal Broadband Availability, Affordability, and Accessibility
• The Connection Between Affordability and Internet Adoption in Oregon

Upcoming Events

Aug 23––Multistakeholder Forum for the National Spectrum Strategy Band Studies (NTIA)

Aug 28––A Community Conversation About Digital Equity, Job Creation and Entrepreneurship in Michigan (NTIA)

Aug 28––Washington Internet for All Webinar (Washington State Broadband Office)

Aug 29––Technological Advisory Council (FCC)

Aug 29––E-rate HotSpot Lending (SHLB Coalition)

Aug 29––Digital Inclusion and College Students (Community Tech Network)

Aug 29––Emerging Tech and the Future of Accessibility (ITIF)

Aug 29––The Path to Digital Equity: Elevating Local Voices to Drive National Impact (Public Knowledge)

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