Throughout his tenure as Federal Communications Commission (FCC) commissioner, Mike O’Rielly has highlighted issues that, while not as headline grabbing as spectrum auctions or net neutrality, are nonetheless vitally important to American telecommunications policy. Earlier this week, he posted a blog on one such vital and oft-overlooked issue: the need to put the Lifeline Program on a hard budget.
Lifeline: Good idea, poor execution
Lifeline is the program most people have in mind when they think of universal service. It provides a discount, usually $9.25 per month, off the monthly telephone bills of eligible low-income consumers. Begun during the Reagan administration, the program has become more visible in recent years (when some began to refer to it, somewhat unfairly, as the “Obamaphone” program). Although this recent notoriety has brought some detractors, most people on both sides of the aisle (including me) agree that sound telecommunications policy should include measures designed to prevent low-income consumers from falling off the network.
But while many support the mission of Lifeline, the program has come under increasing fire because of its explosive growth and the potential for waste, fraud, and abuse. As Commissioner Ajit Pai has noted (0), the program grew 160 percent from 2008 to 2012, reaching a zenith of $2.1 billion annually. Much of this growth was driven by the program’s expansion to prepaid wireless phones, which offered free rather than discounted service and was subject to little oversight. A 2010 General Accounting Office (GAO) report (1) criticized the program’s lack of internal controls, such as the inability to detect individuals who unlawfully claim multiple subsidies. The FCC itself estimated that 15 percent of Lifeline recipients may be ineligible.
Even setting aside illegality, estimates vary widely regarding Lifeline’s efficacy: As Commissioner O’Rielly noted last year (2), academic research cited by the GAO estimates that only 1 in 8 Lifeline recipients would not have service without the subsidy, which equates to a failure rate of 88 percent (a rate that is even higher among wireless recipients).
To its credit, the FCC in 2012 enacted significant reforms to Lifeline in an attempt to rein in this abuse. While these reforms were helpful and overdue, the GAO (3) nonetheless concluded last year that “the Lifeline program, as currently structured, may be a rather inefficient and costly mechanism to increase telephone subscribership among low-income households.” As the FCC moves forward with its plan to expand Lifeline to include broadband service, it should continue to explore ways to strengthen the program, increase accountability, and reduce the potential for abuse. One such reform, suggested by Commissioner O’Rielly but thus far not adopted by the commission, is to put Lifeline on a hard budget.
The case for a hard budget
There are numerous potential benefits to giving Lifeline a hard budget. Most obviously, it is a quick structural reform that will arrest the runaway growth of the fund’s size. Absent a binding upper bound, there remains pressure to sign up as many interested recipients as possible, with no countervailing pressure to make sure the program is not imposing a greater burden than necessary on consumers who fund the program. This lack of countervailing pressure helps explain how the Universal Service Fund (USF) contribution rate rose from 3.2 percent in 1998 to a whopping 18.2 percent today.
Relatedly, a budget would lead to greater efficiency: A limit on annual dollars would generate interest within Lifeline to find ways to get the biggest bang for the buck and reduce the inefficiency that the GAO criticized. By holding the program accountable for its annual expenditures, a budget would create incentives to ferret out fraud and abuse.
Importantly, a hard budget would meet the desires of a bipartisan congressional committee charged with FCC oversight. A year ago, Senator Claire McCaskill (D-MO) asked all five commissioners (4) if there was any objection to “placing a cost cap on the program.” At least four of the five endorsed the reform, which she said she “would like to see . . . instituted,” yet it has not yet come to pass.
Finally, a hard budget would bring Lifeline in line with the other USF programs (the high-cost fund and the e-rate program), each of which were subjected to annual budget limits following concerns about fraud (5) and abuse (6).
The primary objection appears to be underutilization of the existing program. The FCC estimates that only about 40 percent of Lifeline-eligible Americans take advantage of the program. Any budget would limit the funds available for the remaining 60 percent. But Lifeline was never designed to offer assistance to all eligible consumers. It is instead meant to help those who cannot otherwise afford telephone service. Telephone penetration rates have hovered above 95 percent for more than a generation, meaning that the vast majority of Americans, including that 60 percent of Lifeline-eligible consumers not enrolled in the program, do not need Lifeline assistance. To the extent that Lifeline is failing to reach a segment in need of assistance, a budget would help the program run more efficiently, weed out claimants who would keep service even without the subsidy, and find ways to better target the subsidy to those consumers who need it.
The bigger battle: Contribution reform
The battle over USF programs’ budgets is a precursor to the larger issue of contribution reform. As I’ve discussed in an earlier post (7), the universal service fund is paid for by a quarterly fee on carriers’ interstate telecommunications revenue (which primarily comprises telephone bills and excludes broadband, for the moment). With USF costs rising and the revenue base falling, this funding methodology is unsustainable. The commission should take advantage of the broadband transition to overhaul USF funding completely, preferably by making the program a line item in the federal budget (8) like most other assistance programs. This would subject the program to greater congressional oversight and impose on the commission a sense of fiscal accountability that the agency currently seems to lack. A hard budget is essential to ensure that the transition to a broadband-focused fund does not duplicate the mistakes spawned by lack of oversight over the fund’s telephone operations.