In This Week's Issue
»	FY 2007 and FY 2008 Funding Status
»	Internal Connection Funding Trends
»	Schools and Libraries News Brief for April 4th - Head Start Eligibility

E-Rate Central News for the Week
April 7, 2008

The E-Rate Central News for the Week is prepared by E-Rate Central. E-Rate Central specializes in providing consulting, compliance, and forms processing services to E-rate applicants. To learn more about our services, please contact us by phone (516-832-2880) or by e-mail. Additional E-rate information is located on the E-Rate Central Web site.

FY 2007 and FY 2008 Funding Status
Wave 45 for FY 2007 is scheduled to be released on Tuesday, April 8th. Funding in this wave is expected to be about $16 million. The cumulative national FY 2007 funding total is approximately $2.05 billion. Internal Connections are still being funded at discount rates of 83% and above, and are being denied at 79% and below.

Although subject to FCC approval, the SLD is targeting mid-April for the release of the first funding wave for FY 2008. As has been historically the case, we expect that the early FY 2008 funding waves will include only Priority 1 applications. One indication that an application may be included in Wave 1 is that its application status has already reached the Quality Assurance review stage. Application status is available by Billed Entity Number in the Apply Online section of the SLD Web site (see Application Status). Explanations of the various application status indicators are available lower on the page.

One side note: We have recently noticed the occasional use of two application status indicators — "Awaiting Applicant Documentation" and "Deferred" — that are not defined in the Explanation section. We understand that these indicators are the result of system errors and will be corrected. Nevertheless, we recommend that applicants who notice one of these status indicators on their own applications contact either their PIA reviewer or the Client Service Bureau (888-203-8100) to make sure there are no problems.

Internal Connections Funding Trends
Three key trends — and one wildcard — have been driving the Priority 2 funding threshold over the last several years. All are likely to affect the threshold in the next few years as well.

One obvious characteristic of the threshold itself in recent years is that Priority 2 funding at 80%, much less anything lower, has become increasingly unlikely. Figure 1 is a graph of the Priority 2 threshold in each funding year since 2001. Only once during this period did the threshold break the 80% level, and only once did it reach it.

Figure 1
Priority 2 Funding Threshold Percentage

The one wild card in projecting threshold funding percentages is the "rollover" process. Although the nominal cap on E-rate funding is $2.25 billion per year, FCC rules provide that funds awarded in earlier years, which are not used, be "rolled-over" into future years. This is not a continuous process, but one that the FCC approves from time to time. As seen in Figure 1, there have been two such rollovers. Significantly, the two situations are quite different. In FY 2003, the additional $420 million in funding allowed Internal Connections to be funded down to 70%, the lowest level since FY 1999. This year, by way of contrast, it appears that, even with an additional $650 million, the threshold is unlikely to drop below 83% (unless even more funds are added).

One disquieting trend for those applicants seeking Priority 2 funding is that Priority 1 (Telecommunications and Internet Access services) funding has been increasing year after year. This is not surprising given the seemingly insatiable demand for greater bandwidth services and the associated expansion of broadband networks. But if annual funding is fixed, and Priority 1 services are funded first, the growing demand for Priority 1 services means increasingly less money for Priority 2. This relationship is shown graphically in Figure 2. The "Committed P1" line shows actual awards for Priority 1 services from FY 2001 to this point in FY 2007 (for which funding is not complete). The "Available P2" line represents the difference — "available" for Priority 2 funding — between the nominal $2.25 billion annual funding cap and the funds that are needed for Priority 1. (Note that the primary factor that Figure 2 does not reflect is the rollover funding in certain years — the "wildcard" discussed above).

Figure 2
Committed Priority 1 Funding vs. "Available" Priority 2 Funding

Figure 3 shows the actual commitments of Priority 1 and Priority 2 funding since FY 2001, taking rollover funds into account. Rollover funds permitted a spike in Priority 2 funding in FY 2003. They should help again in FY 2007, albeit with the threshold only reaching down to 83% with currently available funds.

Figure 3
Actual Commitments vs. Funding Caps

The second trend that is important is the demand for Priority 2 funding, particularly for applicants at the 90% level. When the "2-in-5 Rule" was initiated, the assumption was that it would help reduce the demand for funding, particularly by the high-discount applicants who had been qualifying for Internal Connections funding year after year. As shown in Figure 4, demand (defined as initial Form 471 requests) from the 90% applicants did decline steeply approaching FY 2005 (the first year that counted for 2-in-5 purposes). But the demand was still substantial, and has not dropped further. Indeed, for FY 2008, the initial Priority 2 demand by 90% applicants has again started to rise. The same trend is evident in demand in the 80-89% discount band.

Figure 4
Priority 2 Demand vs. Commitments for 90% Applicants

Figure 4 illustrates another important factor in E-rate funding analysis. Not every dollar of initial funding demand is ultimately awarded, even for 90% applicants who have always been above the Internal Connections funding threshold. Initial demand includes a number of applications or individual funding requests that are subsequently canceled, denied, or reduced. Historically, this has been particularly true for the more complicated Priority 2 requests. This brings us to the third trend.

Beginning in 2006, the FCC issued a series of appeal decisions known as Global Resolution Orders, or "GROs" (see FCC GROs). Each GRO dealt with a number of applicant appeals of funding denials, initially made by the SLD as the result of largely procedural rule errors made by the applicants. In all but a few cases, the FCC decided that funding denials were too strong a penalty for these mistakes, and waived the rules for these applicants. More importantly, the FCC instructed the SLD to change its application review procedures so that, when mistakes were identified, applicants usually would be given at least 15 days to correct them. Beginning later in 2006, largely as a result of these more applicant-friendly procedures, funding denial rates have been dropping sharply.

This drop is shown clearly in Figure 5 which measures the percentage difference between initial funding demand (excluding Priority 2 requests at sub-threshold discount rates and still pending FY 2007 requests) and final commitments. Decreasing denial rates affect funding for both Priority 1 and Priority 2 requests — admittedly greater for Priority 2, but significant for both.

Figure 5
Funding Reduction Percentages: FY 2005 — FY 2007

To summarize: Three trends are adversely affecting the availability of Priority 2 funding for all but the highest discount applicants. They are:

1. The demand for Priority 1 continues to grow. Every additional dollar committed to Priority 1 means one less dollar for Priority 2.
2. Demand for Priority 2 funds by high-discount applicants dropped for a few years preceding implementation of the 2-in-5 Rule, but then flattened. It is up again for FY 2008.
3. New SLD application review procedures, implemented in the aftermath of the FCC's Bishop Perry decision, have reduced the denial rate on funding requests.

These trends have already substantially reduced the likelihood of Priority 2 funding for applicants at 80% and below. If continued, even 90% applicants may be affected, perhaps as early as FY 2008. The only saving grace, in some years, may be the addition of rollover funding - but even the added $650 million in FY 2007 was not enough to lower the threshold to 80%.

Next week's newsletter will discuss the immediate outlook for Priority 2 funding in FY 2007 and FY 2008, and the longer-term consequences and options for both applicants and program administrators.

Schools and Libraries News Brief for April 4th - Head Start Eligibility
The SLD's April 4th News Brief discusses Friday's update to the Eligibility Table for Non-Traditional K-12 Students to include a new column on state-by-state eligibility of Head Start students and facilities (see Non-Traditional K-12).

Background: The E-rate eligibility of students and facilities varies from state to state depending upon each state's legal definition of elementary and secondary education. Every two years, USAC sends a letter to each state's department of education seeking updated guidance. Historically, eligibility decisions on pre-K, adult education, and juvenile justice — so called "non-traditional K-12" schooling — have been posted on the SLD's Web site.

A couple of years ago, questions arose as to the eligibility of Head Start students and facilities. Initially, a decision was made that Head Start is a form of pre-K education; if pre-K was eligible in a given state, so too was Head Start. It soon became apparent that this decision was overly simplistic. Although Head Start dealt with pre-K children, not all Head Start operations were considered schools by their states. Late in 2007, USAC sent special letters to all states where pre-K was eligible requesting additional information on the inclusion of Head Start programs in each state's definition of elementary education. The state-by-state information posted last week is the initial result of this inquiry.

Last week's SLD News Brief makes several important comments about Head Start eligibility. First and foremost, it emphasizes that a Head Start facility must meet the following two tests to be considered eligible for E-rate:

• "The Head Start facility must meet the statutory definition of elementary school under federal and state law.
• "The state in which the Head Start facility is located must consider the facility to be a school."

Secondly, the News Brief provides the following additional explanations of the brief Head Start eligibility comments included in the revised table:

• "Not yet confirmed. USAC has asked for information from the state department of education or for a confirmation of information already provided. Either the department has not yet responded or USAC needs some additional information and will be contacting the department in the near future.
• "Yes, if part of a public school district ... Head Start programs that are run from public schools can apply as part of the school's application or they can apply on their own. During PIA review, USAC may ask for the name of the Head Start program's public school district or request additional information.
• "Yes, if ... a stand-alone facility recognized by the state (hyperlink). Click on the link to view a list of Head Start facilities that are eligible in the state. If a facility is not on the list, USAC requires a confirmation from the state that that facility is eligible, or the facility will be removed from the funding request and the dollars requested will be modified appropriately.
• "Yes, if ... a stand-alone facility recognized by the state (no hyperlink). You must contact your state department of education to find out if a particular facility is considered eligible by the state. However, USAC will require verification that a facility is eligible, or the funding request will be modified appropriately."

Since this is the first time that Head Start eligibility information has been posted, applicants and service providers should be aware that changes may be forthcoming based on further conversations between USAC and certain states on USAC's interpretation of earlier responses (or lack of responses).

(Note: A formatting change is expected shortly; the currently posted version is easily readable only with Internet Explorer 7, not earlier versions.)