Legislative Help Sought to Fix Universal Service Accounting

A change in USAC’s accounting required by the Office of Management & Budget has resulted in a loss of funds, a possible increase in the amount of money carriers will have to pay into the Universal Service Fund (USF) and possible shortfalls in funding for rural telephone companies, schools and libraries. Gumper said 2 changes led to the problems: (1) USAC’s switch Oct. 1 from traditional Generally Accepted Accounting Principles (GAAP) to a federal version known as GovGAAP. (2) The FCC’s decision in Sept. to apply the Anti-Deficiency Act (ADA) to USAC.

The changes, particularly application of the ADA, required USAC to sell off more than $3 billion in investments in money market and mutual funds and reinvest in Treasury securities. That resulted in $4.6 million in penalties and losses and an estimated $30 million annual loss of interest revenue. The move to ADA compliance also disrupted USAC’s procedure of sending out funding “commitment” letters to schools and libraries before having the full amount of USF contributions from telecom carriers on hand to pay the schools. This procedure was used because schools and libraries need to know federal subsidies are coming before they can enter into contracts with suppliers. Payments weren’t made until much later, when the vendor sent an invoice to USAC. However, the ADA doesn’t allow a govt. agency to make funding “obligations” without having the funds in hand and the USAC commitment letters have been interpreted as “obligations.” That means USAC must now have enough cash to pay for the projects when it sends the advance commitment letters. USAC said there’s no benefit to the new procedure, which is complicated by the fact that the USF contribution and funding cycles don’t coincide.

USAC hasn’t issued new funding commitments for the E- rate and rural health care programs since Aug. because it didn’t have enough cash on hand to cover them. The agency announced Wed. that it doesn’t know when it will be able to resume issuing commitment letters, but estimated “late November if not sooner.” The action has left 4,000 schools and library applicants and 580 rural health care applicants without discount commitments, Gumper said. Already, some schools, libraries and health care facilities are cutting back on projects because of the uncertainty, Gumper said. USAC has estimated it has held up more than $300 million in funding commitments so far. He said USAC will have about $1.4 billion in commitments ready to go by year end but expects to have only $750 million cash on hand.

While the problem has been concentrated so far in the E-rate program, rural telcos are beginning to express concern that the high-cost program also will be affected. “We're closely monitoring the situation,” said an NTCA spokeswoman, who said USAC board members talked to her group recently. Legg Mason said in an Oct. 27 report: “The possibility exists that USF payments to rural carriers may be delayed beginning as early as late 2004 or early 2005… One of the most critical issues will be how the FCC will decide to treat projected costs used to calculate high-cost support. If these projected costs are determined to be obligations for accounting purposes, the High Cost fund may face similar restrictions and disruptions to that experienced under the E-rate program… Clearly, significant political pressure… will be brought to bear on this issue by the rural carriers. At this point, it is unclear whether or not USF payments will be significantly postponed or delayed, but the uncertainty has caused concern in recent weeks among the RLEC [rural LEC] community.”

Gumper and other USAC board members met Oct. 20 with a variety of interested parties such as telecom associations, education groups, rural health care groups, the National Governor’s Assn., NARUC and AARP to seek help. The goal is to gain a USAC exemption from the ADA, possibly by adding a provision the omnibus appropriations bill. Gumper said there’s precedent for such an exemption for specific agencies, such as the Federal Highway Trust Fund and the U.S. Information Agency. Sens. Rockefeller (D-W.Va.) and Snowe (R-Me.), chief sponsors of the E-rate program, have said they're concerned about the situation, and Gumper said others on the Hill are being contacted by interested groups. Key targets are chmn. of the appropriations and commerce committees. Legg Mason said: “Congressional action could be in the works, in our opinion, as lawmakers are not likely to take kindly to significant delays in USF support monies impacting their states and quite possibly, their constituents telephone services.”

Gumper said the accounting changes could result in an increase in the contribution factor, the figure charged telephone companies for USF payments. The factor, which generally is 9% now, usually is passed on to consumers. USAC has estimated the factor could raise well into double digits as a result of the ADA, creating what Legg Mason called “a serious political challenge.” Gumper said an additional concern is the effect of the ADA on USAC’s recent practice of applying unused E-rate funds to reduce the contribution factor, a tool the ADA may prevent it from using.

In a handout at the meeting with industry and other groups, the USAC board said the FCC used $550 million in E-rate money to reduce the contribution factor in 2004. Until the ADA was applied, “use of those funds to lower the contribution factor was simply a cash management matter -- the lag between collections and disbursements meant that the USF cash balance could safely be reduced,” USAC said. “Now that USAC must have funds on hand in order to issue commitments, USF must recoup the $550 million in order to restore E-rate funding to the mandated $2.25 billion cap.” The Legg Mason report said some industry representatives have suggested an alternative to legislation would be significantly raising the contribution factor long enough “to build up an adequate reserve of available funding to meet the outstanding obligations of the various funds.”

The USAC board emphasized that the new financial rules “address the accounting treatment of the [USF] and are unrelated to efforts by USAC and the FCC to eliminate any waste, fraud or abuse in existing USF programs.” The board warned that “left to stand, [the new rules] will adversely impact consumers, service providers and program beneficiaries.” For example, the board said: “Most schools and libraries will not know the status of their funding requests until late in the school year or even after the year has ended.”

The accounting changes weren’t intended to have such an impact on the way USAC administers the programs, Gumper said. “No one ever thought this would happen.”