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A $73 Million Spending Spree

Ohanian Comment: This is an eye-opening, jaw-dropping series on the growing e-rate scandal--as revealed in Atlanta schools. And the real scandal is that, despite all this money, kids didn't have access to computers. As the teacher who sent me the articles said, "Out of 36 computers in the sixth grade, we had 10 that worked for most of the year. And at one time, nobody in the sixth grade had internet access!"

Atlanta Public Schools misspent or mismanaged nearly $73 million from a national program intended to give poor children access to the Internet, an Atlanta Journal-Constitution investigation has found.

With virtually no limit on spending, Atlanta since 1998 has built one of the country's most lavish computer networks for schoolchildren.

Now, Atlanta says it needs $14 million a year -- three times the district's textbook budget -- just to run and maintain the network. And much of the promised benefit to students has yet to materialize.

Signs of the spending spree can be found throughout the school system.

At one elementary school, equipment powerful enough to operate a small school district runs just 20 computers. At another, Atlanta billed the program for electronics for twice as many classrooms as the school has. Millions of dollars were spent at other schools that were closed or demolished within a few years. Elsewhere, boxes of costly computer components, some still wrapped in plastic, gather dust in storage.

At three Atlanta elementary schools, the cost of bringing high-speed Internet access to classrooms reached about $1 million. Suburban Forsyth County, by contrast, paid about $200,000 for the same result at much larger schools.

The district spent money without requiring bids for the best price, with little oversight from school board members and few questions from check writers in Washington who subsidized the work. APS officials defer many questions about spending to former employees.

The national program that financed Atlanta's extravagance, called E-rate, won't pay for computers but helps schools pay for Internet infrastructure they might not otherwise be able to afford. Now, amid charges of waste and fraud around the country, the program faces mounting scrutiny in Washington.

Americans everywhere have picked up the tab for E-rate through a surcharge on their telephone bills.

Atlanta's high concentration of poor students put its schools first in line for E-rate dollars. The district took full advantage, soaking up nearly five times more E-rate money than any other Georgia school system. Nationally, only Cleveland was approved for more per pupil from the program during Atlanta's four years of E-rate funding.

Even after spending so much, Atlanta asked E-rate to subsidize an additional $81 million in 2002, in part for still more upgrades. E-rate officials denied nearly all of the request after finding that the district wasn't making price the primary factor when awarding contracts.

School officials defend their aggressive pursuit of the funds. "If federal money is out there for us to provide services for the children of this school system, then we have an obligation to go out and get it," said Margaret Coleman, the district's chief financial officer.

E-rate has helped Atlanta to dramatically upgrade its outdated computer network. Students in every classroom are now able to do research on the Internet. Teachers can access powerful databases to analyze test scores and plan lessons.

But Atlanta's free spending also bought a network so sophisticated that APS has asked E-rate to help pay $14 million more next year to operate and maintain it. Because Atlanta lost E-rate funding the past two years, city taxpayers currently foot the bills to run it -- $7 million this year.

To track E-rate spending in Atlanta, the newspaper examined thousands of invoices, inspected equipment in a dozen schools, and interviewed dozens of school officials, vendors and consultants. Among the findings:

APS repeatedly ordered equipment and upgrades that it did not need, often choosing the most expensive components on the market.

Price played little role when APS chose vendors, so the district routinely paid them too much. Vendors charged widely different prices for similar equipment. Hundreds of invoices indicate full price when education discounts of up to 45 percent are common.

APS often is not sure what it bought because invoices are vague, incomplete or inaccurate. In some cases, the newspaper found, the district received lower-grade cable than it had paid for, or did not get equipment that appeared to have been purchased.

One vendor told the Journal-Constitution he submitted proposals to E-rate that included goods and services that were never delivered, but said he provided Atlanta schools with other equipment and work of equal value. The district hired an investigator to look into the vendor's E-rate work after the newspaper showed officials the billing records. That inquiry is ongoing.

Charles Engstrom, Atlanta's deputy superintendent of operations, conceded the vendor's vague paperwork was troubling. "The records are not there to show anything was done wrong, but there's nothing there to show it was done right," he said.

Thelma Malone, president of the Atlanta Council of PTAs, expressed concern that students may not have gotten the best use of resources. "We are hoping that the superintendent will get to the bottom of this," she said.

Top district officials said they could not answer many questions about E-rate spending because key decisions were made before they came to work for the district.

But they defended the decision to build the most sophisticated network possible. "This money was being given to provide this kind of technology, if not for current use, for future use," said Beverly Hall, Atlanta's school superintendent since July 1999, 15 months after the first E-rate contracts were approved. "We needed to take advantage."

Sometimes, though, building for the future simply wasted money. Case in point: Atlanta's spending on wireless technology.

Anticipating a day when every student would have a laptop, APS in 1999 began wiring most schools for wireless Internet access, at a cost of at least $2 million. Because the cost of buying tens of thousands of laptops was prohibitive, however, the district largely abandoned the system about three years later in favor of a much cheaper alternative.

Hall said the district had beefed up E-rate oversight. Atlanta last year obtained substantially lower prices after rebidding E-rate work, and adopted a procedure last month for banning vendors who don't deliver contracted services.

These steps came only after federal regulators found the district wasn't bidding work properly and denied Atlanta's 2002 E-rate request.

School officials referred many questions to the district's former technology director, Arthur Scott, who resigned last year to take a job with Decatur city schools. Scott declined to explain how prices were determined.

"We followed the guidelines and the rules, and that's the best I can tell you," Scott said.

Learning tool

The Internet was a young technology in the mid-1990s, but educators saw its value as a learning tool even then.

In 1996, Vice President Al Gore pushed through changes to a Depression-era program designed to help rural areas get telephone service. Dubbed the "Gore tax" by critics, the E-rate program gives schools up to $2.25 billion a year.

Until recently, E-rate escaped extensive scrutiny. But abuses have prompted Congress and the Federal Communications Commission to take a closer look.

Rep. James C. Greenwood (R-Pa.), whose House subcommittee is investigating E-rate fraud elsewhere in the United States, said the problems reflected more than just growing pains for a huge new program.

"If we weren't doing this investigation, there would be pigs at the trough for as long as this program's out there, and they would be stealing money, and they would be squandering money, and they would be keeping money away from the kids who need it," Greenwood said.

Most school districts in Georgia and elsewhere don't get all the E-rate funding they want because the money runs out. The program's pool of money, while large, cannot meet the demand.

Poor districts need contribute only 10 percent to 20 percent toward the cost of most E-rate projects, and until this year they could ask for as much money as they wanted.

The ingredients became a recipe for extravagance, allowing Atlanta to build the most sophisticated computer network money could buy. That's exactly what Arthur Scott did.

Corporate interest

E-rate's promise of billions stirred a frenzy among technology companies eager for the business and districts anxious to harness the Internet's seemingly boundless potential.

Scott, APS' technology director and the son of a former principal, quickly realized the possibilities.

So did major technology companies. IBM Corp. brought Scott and his staff to North Carolina for a weekend retreat on Atlanta's technology needs. Cisco Systems, a manufacturer of network electronics, sponsored an E-rate seminar in Atlanta. BellSouth gave APS $45,000 to plan for technology in the classroom.

In April 1998, Atlanta gave BellSouth the task of developing a "cost-conscious strategy" to upgrade the district's network. Cabling work at individual schools went to five other vendors, including IBM and Lucent Technologies.

For a local match of $1.7 million, Scott told the school board, the district could get enough from E-rate to do more than $8 million in work.

The board did not vote on E-rate contracts again for five years. Contracts were automatically renewed.

During that time, Atlanta and E-rate paid vendors nearly $73 million, including $13 million in local matching funds. E-rate approved an additional $22 million, including $10 million that the program hasn't paid because of a paperwork error. Much of the remainder was never spent.

School board Chairman Mike Holiman said the board had some idea of how E-rate money was being spent but that details were left to school staff. "I would say that [E-rate] has been under the radar of the board," Holiman said.

Vendors played a crucial role in advising Scott on how to build and equip the network. Cisco engineers practically lived at APS in the early going, Scott said, mapping out the network. IBM, BellSouth and Lucent also helped with the design, he said.

But Scott said Atlanta used its own specifications, or advice from outside consultants, to decide precisely what the network needed. "We always took an independent stance, so we wouldn't have to rely on a vendor to tell us what we needed to do."

Scott said he envisioned a powerful network worthy of a Fortune 500 company. "We wanted a network where we could literally deliver instructional services anywhere, anytime, anyhow," he said.

With federal money flowing, the school system spared little expense.

Atlanta installed Cisco's top-of-the-line electronics -- the equipment that moves Internet traffic through cyberspace -- in every school, rather than in a limited number of regional hubs. Just one or two of the components could run an entire network; Atlanta ultimately bought more than 200 of them at $50,000 to $100,000 each.

The district laid miles of fiber-optic cable, the most expensive on the market, to many classrooms. But under Atlanta's network design, more affordable copper cable could have been used with no loss of speed.

APS even wired some schools twice, first with copper cable and a year later with fiber-optic cable and entirely new electronics. The resulting network produced more horsepower than that available to Georgia Tech students.

Scott said he briefed his superiors on the cost and capabilities of the network he was building. Scott's former supervisors said they understood the network's general characteristics, but let Scott decide what equipment and services to buy.

Hall, the superintendent, said she focused on classroom instruction during her first years in office, leaving E-rate management to others. "It was not my priority at that time to begin getting into the bowels of what was going on," she said.

APS launched its most costly upgrade in 2001 at middle and high schools. For a price of $7.3 million, BellSouth installed a new network backbone using the fastest technology on the market. This "gigabit ethernet" system boosted capacity tenfold.

The expansion wasn't made out of necessity. The schools' existing system easily handled Internet traffic.

But school officials, looking years down the road, wanted a system that could carry telephone calls over the computer network and provide streaming video to every classroom computer.

BellSouth told APS it could sharply reduce telephone bills in the long run by merging data, voice and video traffic on one network.

In 2002, however, Scott urged management to slow down plans for a second phase extending the gigabit network to elementary schools. E-rate had refused to pay a $2.7 million bill from BellSouth because of a paperwork error. Scott advised against moving ahead with the upgrade until the debt was paid.

Scott warned that the district could be on the hook for the full cost of operating and maintaining the new network if the school district lost E-rate funding.

In an interview, Scott said he also did not believe children in elementary schools needed the advanced technology that the new network would make possible.

BellSouth appealed directly to Hall and Robert Beman, then the district's chief information officer. Hall said she signed the $9.2 million contract for the elementary schools at Beman's urging.

"He felt this was the wave of the future and we were to take advantage of E-rate to do that," said Hall.

But the promised benefits of the gigantic data pipeline to Atlanta students remain largely untapped.

Widespread use of futuristic educational tools, such as streaming video and real-time instruction over the Internet, is still years away.

When they use it, APS students still surf the Internet at roughly the same speed as in 1999, before the gigabit upgrade. In a 2002 survey, three of four kids said they used computers less than an hour a day in Atlanta's classrooms, or not at all.

School officials are also still waiting for the anticipated savings on telephone bills because the Internet-based phone system remains on the wish list. Meanwhile, with the higher-speed network, BellSouth's monthly charge to bring data to schools has skyrocketed, from $185 a school in 2000 to more than $2,000 today.

In 2003, without E-rate funding, APS allowed all but a few of its computer maintenance contracts to lapse rather than pay the $3.8 million cost to service tens of millions of dollars' worth of equipment.

Lack of competition

School officials' relationship with E-rate vendors drove up costs even more. Vendors did not compete against one another to offer the best price; APS simply divided the work among them. Scott said he made the process more competitive by bringing in more contractors. But records do not show that officials ever questioned vendors' prices.

One vendor, Multimedia Communication Services Corp., or MCSC, routinely charged rates several times higher than market price to connect computers to the network -- up to $400 for each copper cable connection and up to $1,000 for fiber. When Atlanta finally rebid cabling work last year, the winning vendor offered $80 per copper connection and $325 for fiber.

R. Clay Harris, president and CEO of MCSC, said some of the connections in older schools required extra work and that he may actually have lost money.

Records show the district paid other vendors at the time as little as $125 per connection. Yet most of the cabling business went to Harris.

Atlanta also paid another company owned by Harris to install connections at schools where E-rate had already paid for computer cabling. Harris said the payments -- totaling more than $1 million in local funds -- were for additional connections in areas such as offices that E-rate would not pay for. But E-rate program administrators said the funding would have covered most if not all of those costs.

Invoices and price quotations raise questions about whether another vendor charged APS full price for Cisco equipment, a practice almost unheard of in the industry. Steep discounts are easy for school districts to get.

In 2000, billing records show, Atlanta DataCom, also known as ADCom, sold Atlanta schools $9.5 million in Cisco equipment with no discount. Cisco, the manufacturer, said it gave discounts of more than 30 percent to resellers such as ADCom.

When Atlanta rebid E-rate work last year, ADCom offered a 38 percent discount on Cisco equipment.

An attorney for the company said the undiscounted prices charged in 2000 included additional "bundled services" in an effort "to simplify billing." These bundled services were not itemized on invoices. ADCom officials declined to be interviewed or to provide documentation of the additional items.

The district also worked the system to maximize E-rate reimbursement.

For example, Atlanta asked E-rate to pay the same $231,250 price for equipment at every school -- even though school buildings varied drastically in size. Auditors for E-rate noted in 2002 that the practice had allowed APS to overbill E-rate $644,728. The issue was resolved by allowing APS to purchase more equipment with the money.

Scott said he routinely asked E-rate for more than he actually needed because federal regulators sometimes reduced the amounts arbitrarily before approving them. "You always ask for more than you need in hopes of getting what you want," Scott said.

Getting money for schools that were scheduled to be closed also increased Atlanta's take from E-rate. The district billed the program $5.5 million for work at schools that later closed or were demolished. In May 2000, Atlanta took delivery of $92,870 in Cisco electronics for Campbell Elementary. Two weeks later, the school closed. The equipment was shipped to storage.

Superintendent Hall and other senior APS officials defend the practice on the grounds that schools sometimes escaped closure at the last minute. They also said they felt obliged to treat all schools equally.

Incomplete records

Just how and where Atlanta spent much of its E-rate money is difficult to determine because some vendors submitted vague invoices. Others did not specify quantities or unit prices of items they installed.

In many instances, records raise questions about whether the district got what it paid for. One vendor invoiced for a top grade of Lucent cable, but Journal-Constitution reporters saw a lower-grade cable installed. The same vendor, NetVersant Solutions, charged $718,000 in 2001 for wiring done in 38 data closets, which contain key network components, but those schools have only 18 closets, records show.

William Fiedler, NetVersant's general counsel, said APS provided the company with the number of closets at each school. NetVersant provided full value to the district, but some work billed for data closets was actually done at the district's main data center, not the schools, he said.

"There is nothing our company did that wasn't at the express direction of the public schools," Fiedler said.

APS billed E-rate for $3 million worth of e-mail and communications servers in 2001 but cannot say how many servers were received. In fact, district officials said they stopped installing e-mail servers in schools several years earlier.

MCSC's Harris said his E-rate funding proposals, which included the servers, were simply a menu of equipment and services that he offered. If some items weren't needed at a school, the money was spent on other items that would qualify for E-rate funding, he said.

E-rate administrators in Washington, however, said funding proposals must match work vendors do. Any changes would have required approval. They said APS never sought change orders.

The school district is now investigating E-rate work involving MCSC.

Tiny Arkwright Elementary illustrates how little E-rate work can actually be accounted for.

Hidden on a quiet street in southwest Atlanta, Arkwright has been on the chopping block for closing since 1995. The school board voted in 2000 to shutter the school. Last week, children left the building for the last time.

Since 1999, Atlanta has received $545,000 in E-rate money for network technology at Arkwright. Today it's hard to see where the money went. Because Arkwright was due to close, the district installed bare-bones electronics and wired most of the school with lower-cost copper cable rather than high-priced fiber-optic.

In 2002 alone, Atlanta billed for $278,250 for unspecified "connection materials" and two servers at Arkwright, based on MCSC's funding proposal. The amount included $52,500 for 44 classroom switches, even though the school needed only 20 for its 20 classrooms.

Trying to reconstruct what that money paid for, however, would be a "waste of time," Harris said, since his paperwork did not reflect the actual work performed.

Harris, a former accountant, said his company did other work, including work at APS' main data center, that was not itemized on invoices submitted to APS and E-rate.

Even so, MCSC billed for the exact amount originally proposed on his paperwork, a total of $12.5 million in 2002 at 49 schools.

Scott, who signed Harris' invoices, said he followed APS and E-rate policies. "The work that was submitted was the work that was done," he said.

After the Journal-Constitution raised questions about equipment purchases, school officials began to inventory what they had.

The newspaper found several million dollars' worth locked up in two storage facilities. At one location, mothballed Cisco electronics worth about $2 million were resting haphazardly on the bare cement floor. At another site, electronics worth $1.4 million or more sat unopened in large stockpiles around the room.

Some equipment was 3 years old, despite federal rules that equipment must be installed the year purchased.

Boxes of Cisco equipment worth more than $400,000 were designated for a school that already had the gear. Expensive switching components were stacked like phone books against one wall. Other equipment lay strewn around the floor or piled in heaps.

Asked why Atlanta might have purchased so much in idle electronics, equipment manager Toney Ward shrugged. "Maybe because of the availability of funding," Ward said, "they decided, 'Let's go ahead and do it.' "

At just one school, $1 million outlay
Top-of-the-line equipment powerful, but often unused

The Atlanta Journal-Constitution
Published on: 05/22/04

Gideons Elementary is a case study in E-rate excess.

Between 1999 and 2002, records show, Atlanta Public Schools spent more than $1 million to build a computer network at Gideons, a 485-student school two miles south of downtown.

How the E-rate program works
Congress created the "education rate" -- or E-rate -- in 1996 to help schools and libraries get Internet access. It is funded by a surcharge on interstate and international telephone calls, usually a few dollars a month.

The money can be used to pay for computer networking infrastructure -- the electronic plumbing required to route Internet traffic to and from buildings. Some equipment, such as computers, does not qualify for E-rate funding.

E-rate can also help schools and libraries pay their phone bills and other telephone-related costs.

Every year, about $2.25 billion in E-rate money is made available to public schools and libraries, private schools with endowments of less than $50 million, and many private libraries. The pool of money does not meet demand, so priority for some requests is given to schools and libraries serving poor students.

The program is administered by the Schools and Libraries Division of the Universal Service Administrative Co., a nonprofit corporation overseen by the Federal Communications Commission.

The USAC board of directors consists of 19 members from schools, libraries and the telecommunications industry. Major companies represented on the board include Verizon, AT&T and Cox Communications, which is controlled by Cox Enterprises, the Journal-Constitution's parent company.

-- Paul Donsky

The price tag about $2,150 per student brought high-speed Internet access to classrooms, along with the capacity to handle technology of the future, such as streaming video to every computer. The bulk of that expense about $1,935 per student was picked up by E-rate, the federal program that helps schools get Internet access.

Just one component of the network infrastructure at Gideons, known as a Cisco 6500 switch, is powerful enough, with modifications, to run a small school system. New Orleans' school system about one-third larger than Atlanta's uses two of the switches to run its entire network. Gideons uses three of the switches, each moving Internet traffic to classrooms. One serves about 20 computers in portable classrooms.

Atlanta installed similar equipment in most of its schools and offices as part of a "decentralized" design that put computing horsepower at schools rather than at a central site or at regional hubs. This arrangement meant that an equipment breakdown at one school would not affect other schools.

But the design greatly inflated the cost of Atlanta's network because it called for at least one set of Cisco 6500 equipment at every school. Each set would serve as the brain of the network, routing Internet traffic to the proper classroom. Atlanta owns more than 200 sets, including 24 that remain in storage. A 6500 costs between $50,000 and $100,000, depending on the specific features.

George Watts, administrator of network services for New Orleans' schools, said there was no good reason for Atlanta to have designed the network this way. "I don't know of any other school district with that [design], and I know no business is going to deploy that," Watts said.

Especially puzzling, Watts said, was Atlanta's decision to put multiple sets of Cisco's 6500 series gear in many schools. Much less sophisticated and far less costly equipment would have sufficed, he said.

"That is ridiculous," he said. "No one that has more than entry-level experience with networks would design something like that."

Atlanta put Cisco 6500 equipment at Gideons and nine other schools in the 2000-01 school year. The new gear replaced other Cisco electronics that had been purchased and installed just 18 months earlier at a cost of about $770,000.

A closer look at the equipment at Gideons stacked up in three "data closets" in racks that look much like a home stereo system reveals further excesses. One $10,500 device designed to connect up to 24 classrooms to the network is installed but unused. Two larger 48-port devices, which cost $9,100 each, are vastly underused.

School officials said the excess capacity at Gideons was for future growth. But there are no plans to increase the number of computers or classrooms at the school.

Abuses tarnish E-rate program
Investigators target lapses in oversight around U.S.

By KEN FOSKETT in Atlanta, JEFF NESMITH in Washington
Published on: 05/24/04

Since 1998, millions of American schoolchildren have tapped into the Internet thanks to a national program that has invested $12 billion on technology in classrooms and libraries.

The E-rate program has poured $2.25 billion a year into communities around the country, from Indian reservations and the inner city to the most rural areas. Americans everywhere share the costs through a monthly surcharge on their telephone bills.


Abuses tarnish E-rate program
Atlanta contract spurs bid questions

$73 million spending spree
At just one school, $1 million outlay
Photo gallery: Behind-the-scenes tour

But increasing evidence of fraud, wasteful spending and mismanagement has dimmed the early promise of the program, which is operated by a consortium of telephone companies, Internet providers and public officials. The abuses underscore years of inadequate oversight, prompting some critics to question the telecommunications industry's role in distributing the money.

At least 40 criminal investigations into E-rate spending are under way, and isolated audits have found millions of dollars of waste.

In 2002, auditors for E-rate uncovered more than $644,000 in overpayments for E-rate work in Atlanta schools.

But, in a report published Sunday, The Atlanta Journal-Constitution found more extensive abuses: The school district paid too much for goods and services, billed for equipment that can't be accounted for, and stored unused electronics worth millions of dollars.

The consequences of insufficient oversight are surfacing in other districts as well:

The Federal Communications Commission ruled IBM Corp.'s aggressive business tactics thwarted competitive bidding in eight school districts. Rejecting more than $250 million in claims, the agency found in December that IBM advised the districts to seek more E-rate work than was justified, greatly inflating the value of IBM's contracts.

In Milwaukee, a grand jury charged two people with billing E-rate for $1.2 million for services that were never delivered. Three others were accused of laundering half the money to Pakistan.

A salesman in Fresno, Calif., pleaded guilty to conspiring with other vendors to win E-rate work. A criminal investigation is ongoing.

A New Mexico school billed E-rate $2 million for Internet access for three times as many classrooms as the school had, auditors said.

SBC Communications Inc. refunded $8.8 million to E-rate for equipment that was never installed in Chicago's public schools.

Congressional investigators have found the latest evidence of abuse in Puerto Rico $23 million in warehoused computer gear waiting to be installed, U.S. Rep. James C. Greenwood (R-Pa.) told the Journal-Constitution. The investigators also found that tens of millions of dollars were spent for high-speed Internet connections at Puerto Rican schools that could not use them, Greenwood said.

He plans hearings next month that will highlight E-rate abuses and examine how some companies have taken advantage of the program.

"When you spend this kind of money in a program that doesn't have much in the way of oversight, you're going to attract some pigs to the trough," said Greenwood, chairman of a House subcommittee on investigations. "We're going to look into it, one pig at a time."

Critics charge that E-rate oversight has been problematic because the fund is partly administered by the industries that collect and receive the money: telephone companies and Internet service providers.

The nonprofit corporation that manages the fund is the Universal Service Administrative Co., a wholly owned subsidiary of the National Exchange Carrier Association, which represents nearly 900 U.S. telephone companies. The FCC sets rules for E-rate and other programs run by the nonprofit.

USAC's bylaws require that board members come from the telephone and information services industries, along with members representing schools, rural health systems and consumers.

Verizon, AT&T and Atlanta-based EarthLink are among the companies with officials on the USAC board. Cox Communications, which is controlled by Cox Enterprises, the parent company of the Journal-Constitution, also has a representative on the board.

The industry's involvement is "almost a formula for fraud and abuse," said Bob Williams of the Center for Public Integrity, a Washington watchdog group that reported on E-rate fraud last year.

E-rate's program director, George McDonald, placed most blame for serious violations on consultants and companies that take advantage of school districts, persuading them to buy goods and services they don't need.

"Service providers . . . sort of lead applicants astray, take over the process, or consultants . . . take over the process," said McDonald.

The inspector general of the FCC, which has federal oversight of USAC, is involved in or monitoring 40 criminal investigations of possible E-rate abuse, but will not say where. The investigations cover equipment and services that were never delivered, procurement fraud and "potential kickback issues," the inspector general's most recent report to Congress said.

The findings of wrongdoing represent only a thin fraction of the program's overall activity, said Mel Blackwell, vice president for governmental affairs for USAC.

"You can't extrapolate from the fact that there have been a few problems and a few people have gone to jail to tens of thousands of funding applications by over 100,000 schools and school systems," Blackwell said.

Yet E-rate administrators concede that no one has audited the program enough to provide a statistically valid indicator of how well or poorly E-rate money is being spent.

"Everybody wants to know what is the level of waste, fraud and abuse in the program," said Tom Bennett, an assistant inspector general at the FCC. "We can't answer that question yet because we haven't done enough oversight."

USAC did not commission the first audits of E-rate until the program's third year. Even then, it reviewed only a handful of school districts.

The agency is now finishing up more than 110 audits, almost three times as many as were published in the program's first four years.

So far, auditors have discovered compliance problems in about one in three school districts and library systems.

"The results are ugly," conceded USAC board member James Jackson.

While helpful in identifying abuse and waste, the audits cannot substitute for independent oversight, the FCC's Bennett said.

Bennett noted that dozens of federal auditors are typically assigned to a $1 billion defense contract, while he and his staff of two audit $5.5 billion dispensed by E-rate and other programs.

Last year, President Bush recommended an extra $3 million to beef up FCC oversight a bit less than the value of unused E-rate electronics that the Journal-Constitution found in two Atlanta warehouses. In January, the Senate removed the money from the agency's 2004 appropriation.

"We would love to be doing more audits than we are doing," Bennett said.

USAC has taken steps recently to curb abuses. It adopted new rules to limit the frequency with which schools and libraries can request subsidies in an effort to discourage them from seeking more than they really need.

In another change, the FCC said equipment bought with E-rate funds cannot be moved for at least three years, unless a school closes. The FCC noted that some districts have been buying equipment for low-income schools and then transferring it to wealthier schools that would not have qualified for funding.

This practice "undermines the intent" of the rules, the FCC said.

Staff writer Paul Donsky contributed to this article.


Hard eye on city schools' hardware

The Atlanta Journal-Constitution
Published on: 05/26/04

Atlanta Public Schools' extravagant spending of federal technology subsidies could land top school officials before a congressional committee investigating waste and mismanagement in the national E-rate program.

U.S. Rep. James Greenwood (R-Pa.), the committee's chairman, said Monday that he will ask Atlanta schools to turn over documents explaining how the district spent $73 million in E-rate and local funds to build one of the nation's most lavish computer networks.

"It certainly wouldn't surprise me if certain members of that school district find themselves at a table facing a panel of congressmen in Washington," said Greenwood, chairman of the investigations subcommittee of the House Committee on Energy and Commerce.

E-rate, the national program that subsidized Atlanta's spending, distributes up to $2.25 billion a year to schools and libraries for the hardware necessary to wire classrooms for the Internet. The program, financed by a surcharge on telephone customers' monthly bills, does not pay for classroom computers.

A Journal-Constitution investigation of Atlanta's E-rate spending, published Sunday, found that school officials paid tens of millions of dollars to build the district's computer network, often choosing the most costly electronic gear on the market and buying far more than the district needed. The newspaper found more than $3 million worth of idle electronics sitting in storage.

The newspaper also found that the school district routinely paid too much because it didn't seek competitive bids based on price. In some cases, the district cannot say whether it received equipment listed on vendors' funding requests because follow-up paperwork is vague or incomplete.

Over the past year, the House Commerce subcommittee has been investigating E-rate abuses around the country, from Chicago to Texas to Puerto Rico. Greenwood, who plans his first congressional E-rate hearings June 9, characterized the newspaper's findings in Atlanta, compared with other school districts, as "pretty darn bad."

"We will have examples of school districts at our hearings who have done this right and school districts who have done it wrong," he said. "I don't think Atlanta is likely to be on the did-it-right panel."

In addition to requests to Atlanta school officials, Greenwood said, his committee also would request documents from the major vendors who performed E-rate work in Atlanta.

Over a four-year period, Atlanta did most of its E-rate business with a handful of vendors, including BellSouth, IBM Corp., Lucent Technologies, Atlanta DataCom, NetVersant Solutions and Multimedia Communication Services Corp.

Atlanta school officials are also likely to face tough questions from E-rate administrators in Washington.

"There are going to be some further steps on our part to look into this," Mel Blackwell, vice president for governmental affairs for the Universal Service Administrative Co., the nonprofit corporation that administers E-rate, said Monday. "No doubt about it."

In a column published in today's Journal-Constitution, Atlanta school Superintendent Beverly Hall acknowledges problems with the district's E-rate program, including poor record-keeping and contracting procedures. She blames most of the shortcomings on former employees and says she has beefed up E-rate oversight. At Hall's direction, the district launched its own investigation into E-rate spending after the newspaper raised questions about a pattern of vague invoicing by some vendors.

"I am not especially proud of our system's management of E-rate, but I am proud of the results," Hall said. "Our students and teachers are benefiting. Children who would not otherwise have even basic Internet access are utilizing state-of-the-art technology to learn. Those benefits will increase for many years to come. So will our expertise in managing the program."

The Atlanta school board on Monday took a defensive stance, circulating via e-mail a document that underscored the computer network's benefits. The document, titled "Key Facts," called the network a "state-of-the-art" system that can handle the district's technology needs for years to come.

In an interview, school board member Emmett Johnson said the district had an obligation to use E-rate funds to upgrade the school system's technology.

Atlanta "was trying to make sure we got the best that was needed for our children to be ready for the future," he said.

That approach to E-rate spending could come under harsh questioning from congressional critics of E-rate, who believe the program gave away too much money with too few strings attached.

"It strikes me that if the Atlanta school board had decided to build this system with its own money, it probably could have built a good reliable Chevrolet," said Greenwood. "If it had been using federal monies, it might have opted for the Cadillac. But since these were free dollars from telephone subscribers, anonymous telephone subscribers all over the country, they went for the gold-plated Rolls-Royce."

Greenwood said he was particularly outraged that Atlanta had equipped every school with the top-of-the-line computer networking equipment.

Atlanta purchased more than 200 sets of the gear, the most sophisticated manufactured by Cisco Systems, to install in every school and administrative site. Just one or two of the components, costing $50,000 to $100,000 each, are powerful enough with modifications to run a small school district.

Greenwood said he was also troubled by the wide range in prices that Atlanta paid its vendors and by all the equipment that is now unused in storage.

"Little old ladies all over America are trying to pay their phone bills, and it really matters to them whether the phone bill is $10 or $12 a month, because they are scrimping," he said. "And to realize that that dollar or two that means so much to them is spent with such utter abandon and with such outrageous profits is disgusting."

Atlanta's spending highlighted some of the problems with how E-rate was conceived, Greenwood said.

"When you are spending someone else's money, it's very easy to do it with abandon," the congressman said. "That's what this is. There is very little accountability in this system, very little oversight in this system, and nothing apparently in the way of standards. It's a system run amok."


Schools' Internet funds blocked

The Atlanta Journal-Constitution
Published on: 05/27/04

Atlanta Public Schools' request for an additional $20 million for its extravagant computer network has been put on hold pending investigations of prior technology spending, federal regulators disclosed Thursday.

Atlanta has received more than $60 million in technology subsidies since 1998 from the national E-rate program, created to bring Internet access to schools and libraries in low-income communities. But Atlanta will get no more E-rate funding until school officials turn over the results of ongoing investigations into how some of that money was spent, the program's top administrator, George McDonald, said Thursday from Washington.

In an interview, McDonald said Atlanta could yet face a full-scale audit of how it handled E-rate money.

"That question is on the table," said McDonald, who is vice president of the schools and libraries division of the Universal Service Administrative Co., a nonprofit corporation that oversees the grants. "If that's what we need to do to be comfortable, that's what we'll do."

In a two-page letter, McDonald asked the Atlanta school district to supply a list and timetable for its investigations involving E-rate work. And he said USAC may ask the school system to expand its inquiries if they do not appear to be broad enough.

McDonald said the findings would be considered in reviewing Atlanta's 2004 funding request, which includes $6 million for telephone service and a new Internet-based phone system, and $14 million for computer operations and maintenance.

Congressional investigators said Monday they have expanded a national inquiry into E-rate waste and fraud to include Atlanta. The House Energy and Commerce Committee plans to request E-rate documents from Atlanta Public Schools and its major vendors, and a key member of the panel said Atlanta officials may be called to testify in public hearings.

McDonald's letter and the school district's investigations were prompted by articles published Sunday and Monday that detailed an investigation by the Journal-Constitution of Atlanta's E-rate spending.

The newspaper reported that Atlanta bought more computer networking equipment than it needed and routinely overpaid for goods and services.

An examination of invoices showed Atlanta paid vendors widely different prices for the same work and appeared to pay full price for expensive equipment, even though educational discounts of up to 45 percent are available.

District officials could not account for some equipment and services listed on E-rate funding requests because follow-up paperwork was vague or incomplete, the investigation found. Some vendors said they sometimes substituted other services or goods of equal value without turning in revised invoices.

The newspaper reported on several irregularities in the awarding of the telephone contract for which Atlanta has sought 2004 E-rate funding. The school system allowed one of its consultants to participate in a January "technical review" of the winning proposal even though the consultant, a subcontractor to the second-ranked bidder, stood to gain financially if the proposal was disqualified.

The consultant also said the winning bidder offered him work worth $1.6 million after he raised technical questions that could have disqualified the proposal.

Atlanta has hired a private investigator to look into the deal for the telephone contract as well as E-rate work involving one vendor, Multimedia Communication Services Corp., after inquiries by the Journal-Constitution.

School officials would not say Thursday whether they have opened investigations into other aspects of E-rate spending. Last week, the district issued a statement saying it would look into "any accusations that surface around E-rate."

McDonald warned School Superintendent Beverly Hall that some of the newspaper's findings could be violations of E-rate rules and that Atlanta could be required to return some of the $60 million spent between 1998 and 2002.

Hall has acknowledged "questionable management" of Atlanta's E-rate program but said the major decisions were made by former administrators who no longer work for the district.

On Thursday, Hall met with an E-rate consulting company that she may recommend hiring to ensure that the district follows E-rate rules and procedures.

Including local matching funds of $13 million, Atlanta spent $73 million to build one of the nation's most lavish and expensive computer networks for schoolchildren. Only one other big-city school district was authorized to spend more money per pupil in the four years that Atlanta tapped E-rate subsidies.

APS lost a chance at E-rate funding in 2002 because of regulators' concerns over competitive bidding and in 2003 because it mailed in grant applications one day late.

Critics charge that administrators of the national E-rate program were slow to detect waste and fraud in part because of insufficient oversight in the program's first years. Those critics have stepped up pressure on USAC.

In 2001, auditors under contract with E-rate spent a week at Atlanta Public Schools, examining $46 million worth of E-rate requests for which the district had been approved in 1999 and 2000.

Auditors found they could not verify that Atlanta had bid E-rate work competitively, a key requirement, because officials could not produce the relevant documents. The auditors were told the paperwork had been destroyed by water damage in a filing room.


Mothballed computers unpacked

The Atlanta Journal-Constitution
Published on: 05/28/04

Atlanta school officials have begun organizing millions of dollars of warehoused computer networking equipment and assembling some of the components for possible use in schools.

Work crews this week moved the unused equipment from satellite storage facilities to the district's main data center, said Charles Engstrom, Atlanta's deputy superintendent for operations. He said the consolidation of warehouses came in response to an investigation by the Journal-Constitution of Atlanta's spending of federal technology subsidies.

The newspaper reported Sunday that reporters had found unused equipment worth at least $3.4 million gathering dust in storage at two different locations. The federal E-rate program had paid for much of the gear with the requirement that it be installed the year it is purchased.

E-rate pays up to 90 percent of the cost of equipment needed to bring Internet access to classrooms and libraries. The program is financed by a monthly fee collected from all telephone customers.

Much of the equipment moved to Atlanta's data center this week was expensive Cisco networking equipment, including switches and routers that move Internet traffic through cyberspace.

The equipment was removed from boxes at the main data center, Engstrom said. Workers then installed some of it into large racks known as chassis that hold up to nine individual components.

Engstrom could not immediately say whether the equipment, much of it several years old, had been previously used at schools.

The chassis were being "configured so they could be made useful," Engstrom said, "so they could be used in the schools where they are supposed to be."

After unpacking the components, workers tossed several dozen of the empty boxes into a trash bin behind an old school off Pryor Street near Turner Field. Many of the boxes had labels that included the date they were shipped to Atlanta 1999 and 2001 in most cases. Other boxes had the names of schools written on them.

The information on the boxes could be helpful to investigators looking into Atlanta's E-rate spending, since it would help determine which components were bought with E-rate money. E-rate has asked other school districts to refund money spent on equipment that was never installed.

Since 1998, Atlanta has built a computer network using $73 million in local money and federal grants through the E-rate program, which is run under rules set by the Federal Communications Commission.

The newspaper's investigation found that Atlanta bought more equipment than it needed, routinely overpaid for goods and services, and had vague or incomplete paperwork that left officials unable to account for some equipment listed on E-rate funding requests.

Atlanta has hired a detective to look into some aspects of the district's E-rate spending program.

On Thursday, Atlanta's request for $20.4 million in E-rate funding for next school year was put on hold. A Congressional committee looking into E-rate problems across the country expanded its inquiry this week to include Atlanta.

On Friday, U.S. Rep. James Greenwood (R-Pa.), the chairman of the investigations subcommittee of the House Committee on Energy and Commerce, said he expects Atlanta school officials will be called to testify. When they do, Greenwood said he plans to ask about the discarded boxes.

"We look forward to asking a series of questions of these officials while they are under oath," he said.


— Paul Donsky & Ken Foskett
Atlanta Journal-Constitution




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