Lifeline Reform: Add a Hard Budget

Why is it so easy for some people in Washington, DC to spend other people’s money?  It is one thing to be careless with your own finances, but it is another for stewards of Americans’ tax dollars or other monies to seem oblivious to the impact of their actions on hard working consumers.  The desire to spend seems to exceed any interest in doing so in a rational and responsible way.  This is exactly the situation facing the Commission’s reform effort for the universal service fund (USF) Lifeline Program. 

Failing a major change in direction, the FCC is preparing to massively expand the size and scope of the Lifeline Program without the necessary inclusion of a hard budget or financial constraints.  Such irresponsible action will balloon a program plagued by waste, fraud, and abuse and result in higher phone bills for every American – including those already struggling in the current economy.  In sum, it’s a recipe for disaster, and I can’t and won’t be part of it.

By the Numbers

Let’s put what the FCC is considering into perspective.  The argument has been made that, as it currently stands, only 40 percent of eligible Lifeline recipients take advantage of the program.  Accepting this as true for argument’s sake, the $1.630 billion spent on the program in 2014[1] would need to increase by 150 percent, or $2.445 billion, for a total of $4.075 billion or more per year in order to reach all those currently thought to be eligible.  That would increase total USF spending to $12.745 billion a year,[2] an increase of $5.275 billion, or 70.6 percent, since 2009, during the current Administration under Chairmen Genachowski and Wheeler.[3]  

Using the FCC’s own data on Lifeline would lead to an even bigger price tag.  In 2014, there were 13.45 million claims[4] out of the 42 million households[5] that were eligible for the program, which is only 32 percent.[6]  Sizing the program to reach the remaining 68 percent would cost an additional $3.464 billion, for a total of $5.094 billion per year.  That would make the Lifeline program the most expensive universal service program – more costly even than the high-cost program, which helps fund the deployment of actual network infrastructure in rural parts of the country.  And all of this assumes that the FCC does not expand eligibility even further in the next item, which is unlikely.

Using this level of spending ($3.464 billion more per year) would have a dramatic effect on calculating the “contribution” factor, which translates into the fees Americans pay on a portion of each month’s phone bill.  If you plugged this additional Lifeline spending into the 2016 first quarter formula, the percentage of Americans’ phone bills that goes toward the FCC’s USF spending (as opposed to service-related purposes or state and local taxes) would increase from 18.2 percent to 26.7 percent,[7] based on the FCC data.  But this underestimates the actual effect since telecommunications revenues continue to shrink yearly. 

Additionally, expanding the spending to everyone currently eligible would increase the number of households receiving subsidized Lifeline service to more than 36 percent of the 116 million American households.[8]  Since Lifeline subscribers are exempt from USF fees, this means that fewer people will be available to cover the expense, so their share of the total bill will increase.  Therefore, this figure would likely rise much higher.    

False Arguments against a Hard Budget

The benefits of a firm budget are undeniable.  Setting a top line figure allows proper balancing of Lifeline with other USF programs, and limits the overall cost to consumers.  It is also the first line of defense against a rapid increase in the program’s size.  Moreover, it acts as a deterrent to providers and recipients to prevent oversubscription or abuse – it’s the difference between handing out candy at Halloween and leaving a candy dish at the door.   

Those who oppose a cap or budget on the Lifeline program seem to congregate around three arguments, which are easily refuted.

  1. The Next Administration Can Worry About Right-Sizing the Program

Certain advocates for expanding the Lifeline Program suggest that now is not the time to determine a budget.  Instead, they argue that everything should be done to ensure that spending covers both voice and broadband, while the next Administration should decide on how best to “right-size” the program in 2017.  Under this line of thinking, the next president would decide the size of the budget, implying a Republican would trim costs or eliminate the program all together and a Democrat would demand even more funds, notwithstanding the fact that the Commission is supposed to be an independent agency that’s not beholden to any Administration.  

This approach is fraught with problems and is intellectually bankrupt.  First, Lifeline shouldn’t be treated as a political football.  The entirety of the merits and problems of any program should be considered regardless of current politics.  It is far too presumptuous to assume what the next president might or might not expect from the next Chairman.  It also ignores the fact that the next Administration will have a host of international and homeland security issues to address, so a Lifeline budget may not be at the top of its agenda.  Second, right-sizing spending later means that services initiated could be curtailed causing unnecessary disruption for consumers.  But perhaps that’s the goal: get people addicted to free broadband now and dare someone to try to take it away later.  Third, this harms service providers who will make investment, spending and resource decisions based on expected demand.  Possible right-sizing later will result in uncertainty and wasted equipment, and will undermine provider efficiencies.  Lastly, this whole line of thinking assumes that establishing a budget can be effectively separated out from the rest of the decisions, as if it is not a key component to decision making.

  1. We Can’t Determine the Right Number

No budget is ever perfect.  Naturally, adjustments will be necessary at some point in the future based on experience and changing circumstances.  To not enact one using this line of thought, simply ignores the fact that the Commission has budgets for each of the other three USF programs.  If budgets are so hard to adopt, how did this very Commission just set a new one for the Schools and Libraries Program, better known as E-rate, eleven months ago?  Moreover, other assistance programs have budgets but are still able to balance demand and outlays so that consumers are not suddenly displaced. 

To initiate discussion, I have suggested, as a starting point, using the 2014 Lifeline spending level, or $1.63 billion, for a period of five years.  At that time, the next Commission can continue at or reset the amount, as necessary.  To reject even a discussion now of an appropriate budget helps confirm my worst fears: proponents plan to spend through the roof and don’t want any accountability.

  1. People Have a Right to Lifeline Funding

At no time in the history of the Lifeline Program, or any USF program, has it ever met the prerequisites to be classified as an “entitlement,” as with Medicaid or Medicare.  No potential recipient can claim that they are entitled to receive Lifeline benefits.  That means that the Commission retains the complete right to determine and limit eligibility, especially to meet budgetary concerns.  As such, the argument that enacting a budget would constrain recipients and thus violate current law is invalid.

USF Contribution Reform is Not the Answer

While I agree that the Commission should move contribution reform, it is disingenuous to treat it as a solution to unrestrained Lifeline spending.  By incorporating new payers (people, devices or services) into the system, it merely masks the true increase in spending.  In other words, expanding the denominator to impose fees on more services, like Internet access, just dilutes the current contribution factor but it does nothing to address the growing numerator (i.e., overall spending).  And, it means that instead of one fee on voice services, as in today’s collection process, there would be smaller fees on multiple services that collectively will total more than consumers are currently paying.  That’s the hidden agenda.  Under this construct, families will pay more, possibly unknowingly, to the Federal government when all of the new services are subjected to the Commission’s fee mandates.

*             *             *

In the end, shouldn’t we expect more from the Commission than runaway Lifeline spending?  Rejecting the enactment of a budget based on erroneous and misleading arguments would continue the FCC’s recent reckless practices that seek to take more money and freedom from Americans.                                                                                                                                             

 

[2] I arrive at this figure by adding the $4.5 billion for high cost, $3.9 billion for schools and libraries, $4.075 billion for lifeline, and $270 million for rural healthcare.  Moreover, this figure is conservative because the Commission had to “find” $1.5 billion extra to fully fund inside wireless connections in schools and libraries,  With program demand at the cap and any future savings tenuous at best, the Commission would need to come up with additional funding going forward or cut back on the Wi-Fi component, an unlikely outcome.

[4] 2015 Universal Service Monitoring Report, Table 2.2.  Under FCC rules, claims are limited to one per household.

[5] Lifeline and Link Up Reform and Modernization, WC Docket No. 11-42, Telecommunications Carriers Eligible for Universal Service Support, WC Docket No. 09-197, Connect America Fund, WC Docket No. 10-90, Second Further Notice of Proposed Rulemaking, Order on Reconsideration, Second Report and Order, And Memorandum Opinion and Order, 30 FCC Rcd 7818, para. 111 (2015), https://apps.fcc.gov/edocs_public/attachmatch/FCC-15-71A1.pdf. 

[6] Other data just recently filed by USAC shows 12,493,961 NLAD subscribers out of 38,861,000 households.  That also yields a 32 percent participation rate.  Letter from Michelle Garber, USAC to Ryan Palmer, FCC, WC Docket No. 11-42 (filed Feb. 24, 2016).

[7] Using the FCC’s Office of Managing Director Public Notice from December 2015, which announced the First Quarter contribution factor, an additional $866 million per quarter was added to the calculation for “Projected Revenue Requirement.”


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