In This Week's Issue
»	FY 2008 and FY 2007 Funding Status
»	Telephone Audits and E-Rate Implications
»	E-Rate Updates and Reminders
»	Schools and Libraries News Brief for May 23rd

E-Rate Central News for the Week
May 26, 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 2008 and FY 2007 Funding Status
Wave 5 for FY 2008 is scheduled to be released on Wednesday, May 28th. Funding in this wave is expected to be $30 million. The cumulative national FY 2008 funding total is $538 million. No Internal Connections requests are being funded yet for this year.

Wave 52 for FY 2007 is also scheduled for release on Wednesday. Again, this will be a small wave providing funding for only ten applicants and totaling just under $2 million. The cumulative national FY 2007 funding total is $2.32 billion — actually down about $400 thousand from two weeks ago as a result of funding reductions or cancellations. The final Internal Connections funding threshold for FY 2007 is 81%.

Telephone Audits and E-Rate Implications
Google the phrase "telephone audit" and you will get a listing of telecommunications consulting firms who provide a highly specialized service of reviewing telephone bills, typically for large organizations interested in controlling their telecommunications expenses. Such reviews require a level of expertise not often found even among the more sophisticated Fortune 500 companies. Thorough audits normally involve the review of hundreds of pages of bills, access to carrier line records and underlying tariffs (often with multiple amendments), and physical inventories of circuits and/or services. In many cases, such audits uncover a number of unsubstantiated charges, often tracing back several years. When overcharges are identified, and confirmed by the telephone carriers, the auditing firms request refunds.

Telephone auditing firms typically work on a contingency basis, asking for a percentage (often up to 50%) of the funds recovered. The sales pitch is quite simple: "We do all the work. If we find no excess charges, you pay us nothing. If we find and recover overpayments, you pay us a portion and keep the rest - and you pay your telephone company less in the future. You can't lose." Indeed, judging from the client lists of many of these telephone auditing firms, many corporations have found this to be a valuable, no-lose service.

Large school districts and library systems are also candidates for telephone audits, and we often encourage them to use telephone auditors every few years. But — and this is a large "but" — it is important for applicants to understand the special E-rate implications of telephone audits.

Specifically, if an applicant has received E-rate discounts for telephone services, which an auditor subsequently finds were not provided and for which a refund is obtained, a discounted portion of that refund should be returned to USAC. Consider the following example:

Suppose a school district has had telephone bills averaging $10,000 per month for the past three years (often the maximum period for which refunds are available), and has been obtaining E-rate discounts on these charges of 60%. If a telephone auditor finds $500 per month in overpayments over that period, the telephone company would be refunding $18,000 ($500/mo. x 36 months). Since 60% of these overpayments had been funded by the E-rate program, the applicant would be expected to return $10,800 to USAC.

But if the district had agreed to pay 50% of the refund to its telephone auditor, it would owe the auditor $9,000. In total, therefore, the district would be paying out $19,800 - $10,800 to USAC and $9,000 to the auditor. In this situation, the supposedly "no-cost" audit means that the district is paying out $1,800 more than its gross refund. The higher the applicant's discount rate, and the higher the auditor's contingent fee percentage, the greater the applicant's out-of-pocket expense. In many cases, the only saving grace is that the applicant's ongoing phone bill should be less, and ultimately there will be a net savings.

The somewhat simplified example above illustrates the basic E-rate issue regarding telephone audits. As with many aspects of the E-rate program, however, there are a number of other issues, concerns, and unknowns. In particular:

1. As demonstrated above, E-rate changes the economics of telephone audits. As such, the nature of any contingent agreement with the auditing firm is more important. Generally, these agreements are negotiable. The following two points should be noted:
   1. In addition to a percentage of any refund, some auditors may ask for a percentage of any ongoing savings for a year or two. Since the net benefits of an audit to E-rate applicants may come entirely from future savings, such ongoing contingent fees may be particularly onerous.
   2. An argument can be made for calculating contingent fees on the basis of net refunds (after USAC repayments), rather than gross refunds. For a high discount applicant, however, this may make the arrangement uneconomic for the auditor.
2. Some telephone companies will not make a refund to an E-rate applicant without first remitting the discounted portion of the gross amount to USAC directly. In such cases, only the net refund is paid to the applicant (and its auditor). If the applicant must repay USAC itself, instructions for doing so are available in the Reference Section of the SLD Web site (see Returning Funds to USAC).
3. Refunds often include an interest component — in some cases, a significant component — to compensate the telephone customer for the time value of money of earlier overpayments. It is not clear whether the discounted portion of refunded interest must be returned to USAC. Since interest is not charged in a COMAD procedure (unless a debt becomes delinquent), when USAC determines that funds have been disbursed in error, there is no precedent for including interest in an applicant-initiated return of funds. Unless and until the FCC rules otherwise, we recommend not returning any portion of an interest refund to USAC. Not doing so improves the economics of telephone audits for E-rate applicants.
4. One potential FCC action that would make telephone audits more attractive to E-rate applicants is the approval of a waiver request by the New York City Department of Education. The filing "...asks the Commission to find that telephone audits are a valuable and cost-effective tool for controlling school and library telecommunications costs and for assuring Universal Service Fund integrity. The Commission should also find that reasonable fees incurred by applicants are a necessary expense for such audits. As a result, the calculation of funds to be repaid to USAC should be based on the discounted portion of carrier refunds - net of audit fees - actually received by an applicant. Such a procedure would assure that an applicant would not be penalized for voluntarily initiating an audit of its own telecommunications service charges." Unfortunately, this waiver request was filed in October 2003 and is still pending.

E-Rate Updates and Reminders
On-site audits being performed this year include a portion dealing with applicant fraud awareness and procedures. Essentially, the auditors are applying some of the same concepts used for corporate Sarbanes-Oxley compliance. Specifically, auditors are meeting with applicant personnel in the E-rate chain of command to discuss:

• Risks and risk assessment
• Procedures to identify fraud and abuse
• How potential instances of fraud are treated and communicated
• How beneficiary employees are made alert to the possibilities of fraud and how to identify or prevent it

For its part, the FCC is continuing with its policies of E-rate suspensions and debarments. This past week, the FCC issued Notices of Suspension and Initiation of Debarment Proceedings to five individuals convicted in connection with the United States v. Video Network Communications, Inc. et al criminal docket. Additionally, the FCC issued final Notices of Debarment to two other individuals who had been the subject of earlier debarment proceedings. Copies of these notices are available on the SLD Web site (see the May 2008 entries at Suspensions and Debarments).

Schools and Libraries News Brief for May 23rd
The SLD's News Brief for May 23rd includes the following three announcements:

1. The SLD has just begun mailing Form 500 Notification Letters for FY 2008. The article briefly summarizes the use of Form 500s to change service start or contract expiration dates (or, more precisely, to notify the SLD of such changes), or to reduce or cancel funding.
2. A series of Special Edition News Briefs will be issued this week to address the Selective Review process. We will provide summaries and comments on this topic in our next newsletter.
3. The SLD special "summer contact" procedures went into effect on May 23rd (the last Friday before Memorial Day) and will remain in effect until September 5th (the first Friday after Labor Day). During this period, the SLD will not hold applicants accountable for responding to PIA inquiries within 15 days if it cannot confirm by telephone that the applicants are available during to summer holiday period.

The downside of this procedure is that funding actions on affected applications will be delayed until applicant contacts are reinitiated. The SLD's application status indicator for "Deferred" indicates:

Your Form 471 is on hold. You were unavailable or you requested that PIA defer the Form 471 review during either our Summer or Winter deferral period. If you wish PIA to remove the hold and continue review, contact your PIA reviewer. If you don't know who your reviewer is, contact our Client Service Bureau at 1-888-203-8100.

In This Week's Issue
»	FY 2008 Funding Status and Priority 2 Outlook
»	FY 2007 Funding Status
»	Schools and Libraries News Brief for May 9th

E-Rate Central News for the Week
May 12, 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 2008 Funding Status and Priority 2 Outlook
Wave 3 for FY 2008 is scheduled to be released on Tuesday, May 13th. Funding in this wave is expected to be about $88 million. The cumulative national FY 2008 funding total is $469 million. Funding is currently being provided only for Priority 1 requests.

The outlook for Priority 2 funding in FY 2008 became a little clearer last week when USAC released its Federal Universal Service Support Mechanisms Fund Size Projections for the Third Quarter 2008. The report shows the following estimated remaining balances in available E-rate funds, up $150 million from the end of the previous quarter:

Last year, when the FCC rolled over an additional $650 million in previously unused funds into FY 2007, it did so in July. The most recent USAC funding report indicates that, should the FCC decide to roll over additional funds into FY 2008, the roll-over amount could be at least $600 million. Conceivably, if the FCC waits until the beginning of August, when USAC's next quarterly report is expected, the available funding could be $100-150 million higher. Based on an additional $600 million and the slightly higher initial demand level for FY 2008, and assuming funding approval rates are similar to those experienced in FY 2007, next year's Priority 2 threshold should reach down at least into the mid-eighty percent range.

FY 2007 Funding Status
Wave 50 for FY 2007 is scheduled to be released on Wednesday, May 14th. Funding in this wave is estimated to be about $13.5 million. The cumulative national FY 2007 funding total is $2.32 billion. The final Internal Connections funding threshold for this year is 81%.

Based on the same USAC quarterly report discussed above, updated for funding decisions made since March 31st, it appears that approximately 1,700 potentially fundable FY 2007 applications currently remain in the PIA process.

Schools and Libraries News Brief for May 9th
The SLD's News Brief for May 9th discusses the following three main topics (including two covered in the E-Rate Updates and Reminders section of our last weekly newsletter):

Out-of-Window Letters for FY 2008:
On May 7th, the SLD issued approximately 450 letters to applicants whose FY 2008 applications were filed after the application window had closed. This would include:

• Online applications submitted after February 7th.
• Paper applications postmarked after February 7th.
• Certifications for online applications that were not received by March 12th, i.e., twenty days after the SLD had mailed reminder letters titled "Notification of Form 471 with No Certification."

As indicated in our last newsletter, the only chance applicants have to correct out-of-window applications is to request waivers of the Form 471 filing deadline from the FCC. Such requests should be filed by July 6th (i.e., within 60 days of the out-of-window notification). Historically, the FCC has granted a few such waivers for applicants demonstrating extreme hardship (e.g., serious illnesses, deaths, or military deployments).

Applicants with "Incomplete" applications - i.e., those applications begun, but not completed, online - will not be receiving Out-of-Window Letters.

Filing Early Form 486s:
Applicants funded in early FY 2008 waves can file Form 486s before July 1st. However, the following cautions should be noted:

1. The FRNs listed can only be for services that will be received starting between July 1st and July 31st.
2. To certify that services will start no later than July 31st, the Item 6a box (on page 2 of the paper form) must be checked.
3. Unless the Form 486 is for basic telephone service only, the applicant must have an approved technology plan covering all of FY 2008 before the Form 486 is filed. The Item 8 technology plan certification affirmatively states that a plan has been approved (not, like some other forms, that it will be approved by the start of service).

Volunteering for a HATS Visit:
In September 2006, USAC instituted a Helping Applicants to Succeed ("HATS") program under which the SLD (or its contractor, BearingPoint) would visit applicants who had clearly experienced difficulties with the E-rate program over the last few years. Unlike ongoing site visits and audits, designed to check compliance with E-rate rules and procedures, HATS is a true educational outreach program. The News Brief explains: "For a HATS visit, no advanced preparation is required. We will not ask to see any of your forms, program documentation, or equipment." Essentially, HATS is an individualized, hands-on, training opportunity. Feedback from applicants experiencing HATS visits has been positive.

Each year, the SLD offers HATS visits to a selected number of applicants that it identifies. But applicants can also volunteer for such visits by contacting the SLD's Client Service Bureau (888-203-8100). If calling, be prepared to provide E-rate contact information and a reason(s) for the request (e.g., prior denials, funding reductions, Commitment Adjustments, Recoveries of Improperly Disbursed Funds, appeals, etc.).