Analysis of the 2004-05 Budget Bill
Legislative Analyst's Office
The California Public Utilities Commission (CPUC) is responsible for the regulation of privately owned "public utilities," such as gas, electric, telephone, and railroad corporations, as well as certain passenger and household goods carriers. The commission's primary objective is to ensure adequate facilities and services for the public at equitable and reasonable rates. The commission also promotes energy conservation through its various regulatory decisions.
Proposed Funding. The budget proposes CPUC expenditures of $1.2 billion in 2004-05 from various special funds and federal funds. This is a $74 million reduction from the current year due to lower expenditures in funds that support various universal service telecommunications programs. The Governor's budget also proposes to permanently establish 18 positions to administer the commission's universal service telephone programs.
At legislative hearings this past session, concerns were raised about the operations of CPUC's California Teleconnect Fund (CTF) program which attempts to improve access to telecommunications services in the state. As a result, the Legislature, in the Supplemental Report of the 2003-04 Budget Act, directed CPUC to report to the Legislature on various issues, including ways in which the program could better achieve its goals. The CPUC submitted the report as required and we considered its findings in the process of developing our analysis. In the sections that follow, we make recommendations on how to improve program effectiveness, maximize the receipt of federal funds, ensure that legislative direction is followed, and enhance legislative oversight of the program.
State Programs. The CPUC administers six universal service telephone programs that seek to expand access to telecommunications services. It does so by subsidizing the cost of telephone services for certain people through surcharges applied to telephone customers' monthly bills for in-state services. One of these programs is the CTF program. This program provides discounts on telephone service, and other advanced telecommunication services that provide access to the Internet (such as digital subscriber line [commonly referred to as DSL] services) to schools, libraries, and qualifying hospitals and community-based organizations. Currently, the CTF program provides a 50 percent discount regardless of the particular qualifying service or recipient. This discount is applied to the qualifying entity's telecommunications bill by the service carrier. The service carrier then submits claims to CPUC to be reimbursed for the discounts provided. Chapter 820, Statutes of 2003 (AB 855, Firebaugh), established the program in statute, although CPUC has been managing a similar program that it established administratively in 1996.
The Federal E-Rate Program. The federal government's E-Rate program is similar to the CTF program in that it also provides discounts on telecommunications services to schools and libraries. The federal program also provides discounts on wiring and hardware needed to expand data access within a school or library. The E-Rate program provides a 20 percent discount on eligible services to libraries and a discount of 20 percent to 90 percent on services to schools. (Higher discounts are awarded to schools in rural locations and to schools with a higher percentage of students that qualify for the National School Lunch Program.) Although schools and libraries are able to participate in both the federal and state programs, the federal discount is applied first to the cost of the services, then the state discount is applied to the remaining costs.
The Governor's budget proposes a significant reduction in expenditures for the California Teleconnect Fund (CTF) program, reflecting the administration's decision not to repay any of the $150 million loan from the CTF to the General Fund made in the current year. Given this, the proposed CTF budget is unlikely to be sufficient to cover projected program costs in 2004-05. While we have concerns regarding the operation of the current program, we find this underfunding to be contrary to legislative direction. To address this, we recommend the California Public Utilities Commission report at budget hearings on the projected funding requirements of the program in the budget year. Furthermore, if the CTF program requires additional funding in 2004-05, we identify options for the Legislature to consider to provide additional funding for the program.
Budget Proposal. The 2004-05 Governor's Budget proposes expenditure of $5.3 million for the CTF program in the budget year. This is a reduction of $21.1 million, or 75 percent, from the expenditure level in the current year. The proposed expenditure level reflects the administration's decision not to repay any of the $150 million loan made from the CTF to the General Fund in the 2003-04 Budget Act. The surcharge that supports this program was suspended in 2003 following the accumulation of a significant surplus in the fund. The surcharge remains suspended, even though the surplus was essentially eliminated by making the loan to the General Fund in the current year.
Projected Program Funding Requirements Exceed Budget Proposal. Although the budget proposes $5.3 million in expenditures, CPUC has projected that the CTF program would require approximately $39 million to cover program expenditures in the budget year based on its projections of demand for the subsidies that the program provides. This is approximately $12 million more than estimated current-year expenditures.
Although demand for the subsidies has typically failed to meet CPUC's budgeted projections, we note that claims have increased significantly in the current year, with over $45 million in claims made so far in the current year. While there is evidence that utilization of the program has increased, the majority of the current-year claims are the result of delays by the telecommunications carriers in submitting claims from prior years (mainly due to delays in the federal E-Rate program that caused carriers to postpone filing their claims until they were sure how much E-Rate funding they would get).
The increased utilization is partly due to recently enacted legislation (Chapter 308, Statutes of 2002 [SB 1863, Bowen]) that expanded the services and discounts available under the program to include qualified community-based organizations. Since this law change, there has been a 90 percent increase in the number of community-based organizations participating in the program. Given these factors, we find that the funding requirements of the program will likely exceed the appropriation proposed in the budget.
Budget Proposal Contrary to Legislative Direction. Chapter 820 requires that the $150 million loan made from the CTF to the General Fund be repaid when the CTF program needs the funds to meet program requirements. Although CPUC notified the Director of Finance (DOF) that it would need a portion of the loan repaid in the budget year, this request was denied. While Chapter 820 prohibits CPUC from raising its surcharge level until the loan is repaid, it does allow CPUC to raise its surcharge level after notification to DOF and the Joint Legislative Budget Committee in cases where DOF has denied CPUC's request for the loan repayment based on program needs. Since it is likely that the CTF funding requirements will exceed the appropriation proposed in the Governor's budget, we find that the budget proposal is contrary to legislative direction.
Given this, we recommend that CPUC report prior to the May Revision on the projected funding requirements of the CTF program for 2004-05. Since the CPUC has had difficulty projecting its budgetary requirements for this program, we think it would be appropriate to make a determination on budget-year funding requirements at the May Revision after the commission has received a greater number of its current-year claims.
We have concerns with the operation of the CTF program as it is currently configured and make several recommendations on how to improve the oversight and effectiveness of this program in the sections that follow. Should the Legislature wish to provide additional funding for the program in the budget year, it can do so by directing CPUC to raise the CTF surcharge (currently suspended) in order to support the augmentation. For example, a 0.1 percent surcharge applied to telephone charges would yield approximately $20 million, which would generate enough revenues to cover the same level of expenditures in the budget year as are estimated in the current year. Another option for the Legislature is to repay a portion of the General Fund loan. However, due to the weakened state of the General Fund, the Legislature would have to balance this priority against other General Fund legislative priorities.
We find that recent administrative changes to the California Teleconnect Fund program have improved the program's service and accountability.
Recent Administrative Changes Have Improved Program Service. We find that the commission has made a number of administrative changes to the CTF program in the past six months. In May 2003, our review of the program found that the then current application process was overly complex. Applicants had to apply for the discount with several different service providers depending on what services they were seeking and the geographic area of coverage. This was often a time-consuming and frustrating process for applicants that was exacerbated by the program being managed by different telecommunications service providers. However, the commission has since streamlined its application process by allow ing applicants to file directly with the commission. This has eliminated the long delays common under the prior system and streamlined the process for adding new discount-eligible services for participating entities.
Recent Administrative Changes Have Also Improved Fiscal Accountability. As mentioned previously, the CTF program in past years regularly overestimated its program funding requirements, in part reflecting delays in the submittal of claims by the carriers. To address this problem, the commission has implemented a new carrier claim forecasting procedure that requires the carriers to submit annual claims forecasts that are based on the preceding year's claims, rather than rough estimates of program participation by CPUC staff. It is still too early to determine the extent to which this practice will improve the commission's ability to forecast budget expenditures. However, we do think it should improve the fiscal accountability of the program by providing a relatively more credible basis—past year's actual claims—from which to set the surcharge level.
The California Public Utilities Commission does not require schools and libraries to participate in the federal E-Rate program as a condition of eligibility for the California Teleconnect Fund (CTF) program. This results in increased costs to the state's program and a loss of available federal funds. We recommend enactment of legislation to require eligible schools and libraries to participate in the federal E-Rate program as a condition for participating in the CTF program.
Program Does Not Maximize Federal Funds. As mentioned previously, the federal government administers the federal E-Rate program that provides discounts on telecommunications services to schools and libraries. Schools and libraries are allowed to participate in both the E-Rate program and the CTF program and receive cumulative discounts from the two programs. The CTF discount is applied to the cost of the telecommunications service after the E-Rate discount is applied, thereby reducing the amount of the discount paid by the state. Despite this, current commission policy does not require participation in the E-Rate program as a condition of eligibility for the CTF program. Furthermore, lack of participation in the E-Rate program reduces federal funds available to schools and libraries in the state.
Recommend Legislation Requiring Participation in E-Rate Program to Be Eligible for CTF Program. We recommend the enactment of legislation that requires schools and libraries to participate in the federal E-Rate program as a condition of eligibility for the CTF program. This change will encourage schools and libraries to maximize available federal funds. In addition, because the CTF discount is applied to the cost of the telecommunications service after the E-Rate discount has been applied, greater participation in the E-Rate Program will lower payments from the CTF for the same level of telecommunications service. This will allow CPUC to stretch the state's funds to provide more discounts with the same level of funds.
Recent legislation has expressed legislative intent that a priority for the state's telecommunications policy is to assist in bridging the "digital divide." The current California Teleconnect Fund (CTF) program does not target its discounts to reach those individuals affected by the digital divide because of their lack of sufficient access to advanced telecommunications services. Given this, we recommend enactment of legislation to direct the California Public Utilities Commission to adopt criteria for targeting discounts in the CTF program to help address the digital divide.
What Is the Digital Divide? Not all people have access to or the capability to use advanced telecommunications (for example, modern information technology such as the Internet). This circumstance is referred to as the "digital divide." The digital divide exists between those in cities and those in inner cities and rural areas, as well as between the educated and less well educated, and between economic classes. Recent legislation has expressed as a priority for the state's telecommunications policy that the state assist in bridging the digital divide (Chapter 674, Statutes of 2002 [SB 1563, Polanco], Chapter 308, Statutes of 2002 [SB 1863, Bowen], and Chapter 820).
Current Discounts Do Not Target Those Most in Need. Currently, the CTF program does not target its discounts to reach those that do not have sufficient access to advanced telecommunications services. Instead, the commission provides the same discount to all qualifying entities (current discount is 50 percent). This contrasts with the federal E-Rate program that determines the level of subsidy for schools based on the number of students at the school eligible for the National School Lunch Program. It uses the lunch program as a benchmark to indicate the poverty level at the school, thereby targeting schools with a higher level of students from low-income households. We find that the commission's current practice of applying a flat discount rate to all eligible program participants is not an effective way to allocate the CTF funds if the state's goal is to expand telecommunication service to people that do not already have access to such service.
Recommend Legislation Directing CPUC to Target Discounts. Given that we find that the current process for allocating discounts does not target populations that are most likely to need expanded telecommunications services, we recommend the enactment of legislation directing CPUC to target CTF discounts based on a criteria that will target the populations that currently have limited access to advanced telecommunications services. These criteria should target the discounts to those in inner cities and rural areas, as well as persons in low-income communities, since these populations have been found to have the lowest level of access to advanced telecommunications services. In addition, we think the Legislature should consider how this program is coordinated with other state and local investments made in advanced telecommunications technologies for K-12 education.
Under current law, the California Teleconnect Fund (CTF) Program has limited parameters guiding its funding level. Given this, we recommend the enactment of legislation that sets a statutory cap on annual CTF program expenditures.
Current Program Has Limited Parameters. Under current law, there are no limits on the number of participants or level of subsidies awarded in the CTF program. Instead, CPUC is given broad authority to administer the CTF program, including the authority to raise the surcharge that supports this program (with approval by DOF) to cover increased program costs.
Potential for Significant Program Growth. While in past years the CTF program has had difficulty in spending its budgeted appropriation, we think recent administrative and legislative changes could result in significant program growth. The CPUC's recent improvements to the application process are likely to contribute to program growth as participants are only required to sign up once and can easily add new services that qualify for the discount. In addition, Chapter 308 increased the discount available to community-based organizations, resulting in a significant increase in participation by these organizations. There are a large number of other community-based organizations that could potentially qualify for this discount, which also could result in further growth in the CTF program.
Chapter 677, Statutes of 1999 (SB 669, Polanco), did increase legislative oversight by bringing the CTF program on budget and requiring that the expenditures be annually appropriated in the budget act. However, given the program's potential for significant future growth, we think that legislative oversight of the CTF program would be further enhanced if the Legislature established parameters to guide the funding level of the program.
Recommend Legislation Setting a Funding Cap on Program. We therefore recommend the enactment of legislation that sets a statutory cap on annual CTF program expenditures. We think that this would increase legislative oversight over the size of the CTF program and assist the Legislature when it evaluates the CTF program budget. A similar practice has been employed with programs funded by the public goods surcharge (an assessment on energy bills), including CPUC's energy efficiency program and the California Energy Commission's Renewable Energy and Public Interest Energy Research Development and Demonstration programs. In these programs, the Legislature enacted caps on revenues generated for these activities. In addition, legislation was also enacted that provided guidelines for how these funds should be spent. We think a similar approach would be effective for the CTF program. The program funding limit should not hinder the availability of discounts to entities that are most in need if criteria are adopted that target the discounts to those that currently have limited access to advanced telecommunications services.