GAO Recommends Moving Universal Service Funds To U.S. Treasury

As part of its recent report on various problems with the Lifeline program, the U.S. Government Accountability Office (“GAO”) recommended that the money that makes up the universal service fund (“USF”) be moved from a private bank account to the U.S. Treasury.[1] According to the GAO, moving the USF to the Treasury will increase federal oversight of the funds and add regulatory safeguards. One other “benefit” of the move suggested by the GAO is that USF money could be used to offset federal debts.

The GAO does not provide any further details on exactly which federal debts it has in mind that should be addressed using the USF. Perhaps USF money could be used to pay down the bill owed to China, to cover Medicare expenses, or to pay for a border wall. It is true that “[i]f the USF were held in the Treasury, the Secretary of the Treasury would have more cash on hand, which could reduce the Treasury’s need to borrow cash and its associated borrowing costs.” But is this a good idea? Absolutely not. A large chunk of the USF is used to support the deployment of broadband networks throughout the country. The digital divide is real and will never be overcome without a support mechanism to drive universal broadband service. Dumping the USF into the Treasury would cause command of the money to politically spiral out of control.

The paragraphs below dig a little deeper into the current state of the USF with a focus on the high-cost fund, and GAO’s suggestion that the USF be moved into the Treasury.

$9 Billion In USF Money & USAC’s Private Bank Account

Four separate support mechanisms make up the federal USF, and each have a different purpose: the high-cost fund, the low-income support mechanism (Lifeline program), the schools and libraries support mechanism (E-Rate), and the rural health care fund. The USF distributes approximately $9 billion a year through these four programs. The Universal Service Administrative Company (“USAC”) is the permanent administrator of the USF. FCC rules, however, prohibit USAC from making policy, interpreting unclear provisions of statute or rules, or interpreting the intent of Congress.[2]

Section 254 of the Communications Act – the universal service statute – requires telecommunications carriers to contribute “to the specific, predictable, and sufficient mechanisms established by the [FCC] to preserve and advance universal service.” Under the FCC’s rules implementing Section 254, carriers contribute a percentage of their interstate and international end-user telecommunications revenues based on a contribution factor set quarterly by USAC and the FCC.[3] First, carriers report projected future quarter revenues using FCC Form 499-Q. The quarterly data is then used by USAC to calculate each contributor’s monthly USF contribution obligation. Carriers receive monthly invoices, and remit the billed amount to USAC. Carriers also annually file a Form 499-A to report the prior year's actual revenue, which allows USAC to perform a true-up – billings or credits to compensate for under- or over-projections on a carrier’s quarterly filings.

USAC maintains the USF funds it receives from contributors in a private bank account, rather than the U.S. Treasury. According to the GAO Lifeline report, all USF funds are held by a private bank in the name “Universal Service Administrative Company as Agent of the FCC for Administration of the FCC’s Universal Service Fund,” and the contract governing the account does not provide the FCC with authority to direct banking activities with respect to the funds in the event USAC ceases to be the administrator of the USF.[4] Based on recent financial information, the GAO reports that as of September 2016, the entire USF account had approximately $9 billion in assets, and, as of December 2015, Lifeline accounted for approximately $80 million. Like other bank accounts, USAC’s USF account generates interest income, which USAC uses to offset administrative expenses related to each USF support mechanism. Furthermore, like other common banking practices, USAC’s bank charges administrative fees. The GAO reports that for 2015, USAC paid its bank annual investment fees of approximately $1.5 million.

What Is The Legal Status Of USF Money?

The money that makes up the USF is considered a permanent indefinite appropriation. The USF is collected pursuant to the Communications Act, a federal law, and the money is subject to extensive federal regulations concerning its collection, maintenance, and disbursement. In 2004, the FCC determined that the Antideficiency Act was applicable to the USF.[5]

The Antideficiency Act, among other things, prohibits an officer or employee of the U.S. government, including federal agencies, from making or authorizing an expenditure from, or creating or authorizing an obligation under, any appropriation or fund in excess of the amount available in the appropriation or fund unless authorized by law.[6] The GAO explains this provision of the statute in simple terms:

Government officials may not make payments or commit the United States to make payments at some future time for goods or services unless there is enough money in the “bank” to cover the cost in full. The “bank,” of course, is the available appropriation.[7]

While the administrator of the fund – USAC – is a private entity, the FCC is ultimately responsible for collection, maintenance, and disbursement of the USF, meaning the Antideficiency Act applies. Since 2004 though, Congress has exempted the USF from the Antideficiency Act, with the current exemption scheduled to run out on December 31, 2017.

What If The USF Is Moved To The U.S. Treasury?

Today, a large portion of the money that is sitting in the USF bank account is tagged for various high-cost programs that are either ongoing or yet to be implemented.[8] For example, of the $300 million that was allocated to Mobility Fund Phase I, just over $185 has not been disbursed even though the reverse auction for that program ended in September of 2012. Similarly, there is about $30 million in rural broadband experiment support sitting in the account waiting to be disbursed. Why is it still there? In both programs, support winners have defaulted and many have had problems meeting pre-disbursement requirements. It’s possible that the amounts of USF money in these two examples will never be disbursed. What, then, will USAC do with the unused or excess high-cost USF money? Contributing carriers definitely shouldn't look for a refund check in the mail. The FCC will use the excess funds to carry out other high-cost fund objectives, or USAC, at the direction of the FCC, may use the money to accomplish other things related to the operation and maintenance of the USF.

Imagine for a minute what would happen if all of this funding was sitting in the U.S. Treasury rather than USAC’s bank account. The excess funding would be used to pay off the U.S. government’s existing debts. To be sure, the GAO made this clear on the first page of its Lifeline report:

For example, by having the funds in the Treasury, USF payments could be used to offset other federal debts, and would provide USAC with better tools for fiscal management of the funds.

As mentioned earlier, one could imagine the myriad of things that fall under “other federal debts.” Of course, if the USF was moved to the Treasury, it’s possible the move would come with certain conditions or requirements restricting its use to specific debts. Or not.

Aside from the discovery of rampant fraud in the Lifeline program, the most important theme of the GAO’s report is USAC’s considerable financial control over the $9 billion USF. This will not sit well with Chairman Pai’s FCC. One FCC Commissioner, Michael O’Rielly, has had USAC in his sights for a long time. He believes USAC has too much power and is a mess. Commissioner O’Rielly said this in May after USAC’s CEO resigned:

The departure of its CEO presents an opportunity for the Universal Service Administrative Company (USAC) to clean up its act. USAC as it has been managed is not sufficiently accountable to the Commission, and is not meeting the needs of universal service stakeholders or the public, who pay fees to support USAC’s operations. Absent significant and timely improvements, I believe that all options should be on the table, including putting USAC’s functions out for contract, as the Commission has done in other circumstances.

After reading Commissioner O’Rielly’s statement, you better believe the GAO’s suggestion to move the USF to the Treasury is getting major traction in D.C. Indeed, the GAO reports that the FCC is in the process of developing a preliminary plan to move the USF out of USAC’s private bank account and into the Treasury. I’ll dig into the details of that in a future post.

[1] U.S. Government Accountability Office, Telecommunications: Additional Action Needed to Address Significant Risks in FCC’s Lifeline Program, GAO-17-538 (May 2017) (GAO Report).

[2] 47 C.F.R. § 54.702(c).

[3] 47 C.F.R. § 54.706.

[4] GAO Report at page 24.

[5] See GAO, Telecommunications: Greater Involvement Needed by FCC in the Management and Oversight of the E-Rate Program, GAO-05-151, Pages 49-51 (February 2005).

[6] 31 U.S.C. § 1341(a)(1)(A).

[7] GAO, Principles of Federal Appropriations Law Third Edition, Volume II, GAO-06-382SP, Page 6-37 (2004).

[8] See USAC, Federal Universal Service Support Mechanisms Fund Size Projections for First Quarter 2017 (Nov. 2, 2016).