NCPA - National Center for Policy Analysis


October 19, 2004

The federal E-rate -- or, more precisely, the Schools and Libraries Universal Service Support Mechanism -- provides discounts to assist most schools and libraries in the United States to obtain affordable telecommunications and Internet access.

Like most large scale government giveaways, the E-rate program, which collects $2.5 billion a year in telephone taxes to hook up schools and libraries to the Internet, has produced a huge amount of fraud and abuse, say observers.

  • The Chicago public schools have more than $5 million in E-rate computer equipment sitting in a warehouse.
  • In San Francisco school officials discovered that a $68 million project should have cost less than $18 million.
  • Puerto Rico spent $101 million in federal grants to wire 1,500 schools to the Internet. Yet the district warehoused most of the equipment for more than three years, and only nine schools were actually connected to the Internet.
  • In June, the Federal Communications Commission reported that 42 criminal investigations were under way.

Large corporations have gained millions from E-rate. In May, NEC Business Network Solutions pleaded guilty to rigging bids at six school districts; the company will pay a $20.6 million fine.

In June, the New York Times revealed that El Paso school district paid IBM $35 million to build a network powerful enough to serve a small city. When the school district couldn't run the network, IBM charged it an additional $27 million to build a maintenance call-in center that was shut down after nine months when funding ran out.

The federal E-rate program, which enjoys congressional bipartisan support, has spent $13 billion to date. Legislators argue that, thanks to E-rate, 90 percent of schools now have access to the Internet.

Source: Lisa Snell, "School Net Scams," Reason, October, 2004.

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