Analysis of the 2007-08 Budget Bill: Education

California Education Network

The California Education Network (CEN) provides advanced networking services to California’s public education institutions. A 2005 audit found that the network was technically sound but lacked important contractual and accountability measures. Actions taken in recent years have improved transparency, particularly of the K-12 portion of CEN (known as the High Speed Network, or HSN). Given these improvements, we recommend the Legislature provide $12.6 million (Proposition 98) to continue HSN. However, we recommend the Legislature enact legislation that would extend the accountability measures to the higher education segments.

Background

The CEN is comprised of two components: the California Research and Education Network (CalREN) and the K-12 HSN. The CalREN is a statewide high-speed, high-bandwidth network that connects the majority of higher education institutes in California to each other, the Internet, the federal Internet2, and other research entities around the country. The HSN is a network of node sites in all 58 counties through which the majority of California’s public K-12 education entities connect to each other. The HSN also connects to CalREN, thereby allowing K-12 entities to connect to higher education institutes, the Internet, Internet2, and other research organizations. For students, faculty, and staff, these networks provide services ranging from basic Internet connectivity to the advanced high-speed networking needed for certain research activities.

Below, we: (1) provide additional background on CalREN and HSN, (2) discuss the 2007-08 budget proposal for HSN, (3) explain actions taken in recent years to increase the transparency of CalREN and HSN, and (4) provide recommendations for further increasing transparency and strengthening accountability.

All Public Education Systems in California Now Participate in CalREN. In 1997, a consortium of higher education and research institutions, led by the University of California (UC), combined their networking resources (funding, equipment, and expertise) to form the nonprofit Corporation for Education Network Initiatives in California (CENIC). This corporation operates CalREN on behalf of its member institutions. It is governed by a board composed of member representatives, with input from a technical advisory committee and a business advisory committee. Over time, the number of educational institutes belonging to CENIC has grown and today the UC, California State University (CSU), California Community College (CCC), and K-12 systems are all members (as are eight private and out-of-state education institutions). The CalREN currently supports over 7.5 million students, faculty, and staff across California’s public education system.

CalREN Supports Research and Collaboration. While the majority of students and faculty primarily use CalREN to access Internet services, CalREN also provides advanced high-speed networking capabilities needed for many higher education research opportunities. CalREN’s relationships with other networks, such as Internet2 (the national advanced services network for higher education and research institutes), allow researchers to collaborate nationally and globally. For these services, each member pays an annual fee to CENIC. For 2007-08, the annual fee for CalREN services, as established by its member board, is approximately $4 million per member. Many members receive additional services from CENIC, such as consulting and equipment leasing.

The HSN Supports K-12 Students and Teachers in Various Academic Endeavors. In 2000-01, the state created HSN (originally named the Digital California Project) to provide network connectivity and Internet services to support California’s K-12 public schools. The administration decided that one viable option to bring connectivity to K-12 entities was to expand upon the statewide high-speed network that already linked the majority of California’s higher education institutes. Thus, HSN was created as an extension of CalREN, funding was appropriated to UC, and CENIC was responsible for managing the network. Today, over 7,000 school sites are able to connect to HSN and use the Internet, videoconferencing, and distance learning tools. They also have access to learning management systems and curriculum planning tools that are hosted centrally by the network. The HSN, and in turn the fees HSN pays to CalREN on behalf of the K-12 system, is funded with Proposition 98 monies.

Fund Baseline Budget and Technology Refresh

We recommend the Legislature provide $12.6 million ($10 million ongoing Proposition 98 and $2.6 million one-time Proposition 98) for the High Speed Network (HSN) in 2007-08. This level of funding would support a baseline budget plus implementation of phase one of a HSN technology refresh plan.

The Governor’s budget proposes $10 million ongoing Proposition 98 for the HSN. In addition, it sets aside $3 million in one-time Proposition 98 monies pending further review of a HSN technology refresh plan submitted by Imperial County Office of Education (ICOE, the lead agency administering the project).

Baseline Budget Appears Reasonable. After examining the detailed HSN budget, we recommend providing the $10 million ongoing Proposition 98 for the project. When combined with federal eRate and California Teleconnect monies, as well as cash reserves, the project would have sufficient funding to support a baseline budget.

Technology Refresh Plan Appears Reasonable. In addition to funding the HSN baseline budget, we recommend providing $2.6 million in one-time Proposition 98 to implement phase one of a technology refresh plan. Specifically, the technology refresh plan would:

• Increase Network Capacity. More capacity would be added to the existing network infrastructure to support greater use and more demanding applications.

• Replace Aging Equipment. Equipment that has reached its contractual “end of life” would be replaced.

• Upgrade Technology. Network enhancements would be made so that new types of applications could be supported. (For example, upgrading to Internet Protocol version 6 (IPv6) will be required to interact with all federal backbone networks by 2008.)

• Improve Performance Monitoring. New performance monitoring equipment would be installed to allow for improved growth planning, problem resolution, and network evaluation.

We think the plan is realistically scheduled, reasonably priced, and needed to maintain reliable service.

Ensuring Transparency

Recent Actions Taken to Improve Transparency

Originally, CalREN and CENIC were created primarily to serve the needs of the UC system. The CENIC was governed with a member board and was treated more as an extension of UC rather than a vendor. As more state entities became members of CENIC and more state monies were expended on CalREN, and later HSN, oversight of the programs became more complicated. Although CENIC members were governing CalREN and HSN, standard project items such as clearly defined project objectives, evaluation criteria, fee calculations/payment structures, and contractual protections for state assets were missing. As a result, questions about the management of CENIC, CalREN, and HSN began to arise, and a series of steps were taken to provide more transparency.

State Law Initially Provided Limited Project Guidance and Oversight. The CalREN project historically has been treated as a UC project with very little state direction, involvement, or oversight. Thus, the higher education members of CENIC have been allowed wide discretion in building and operating the network. In 2000-01, the state funds UC received to develop and implement HSN by expanding the existing CalREN infrastructure came without any specific guidance, stated goals, or measurable objectives. The 2000-01 Budget Act required only that the funds be used for “expanding Internet connectivity and network infrastructure for K-12 schools and county offices of education.”

Responsibility for the HSN Project Shifted From UC to the California Department of Education (CDE) in 2004. Between 2000-01 and 2004-05, the state provided more than $100 million for HSN with still virtually no statutory guidance. While the substantial state investment resulted in network connectivity to all 58 counties, it also magnified the need for more transparency and accountability. In 2004-05, the Legislature shifted funding for HSN from UC to CDE which, in turn, awarded a contract to ICOE to administer the project. This shift of responsibilities was made to ensure HSN would be better aligned with K-12 priorities and support the specific needs of K-12 schools. As questions continued to mount about project transparency, protection of state assets, and large cash reserves, no additional funding was provided for HSN in 2005-06.

Bureau of State Audits (BSA) Finds Notable Contract Irregularities. In 2005, BSA conducted a review of HSN and assessed whether the resources supporting it were being used appropriately and efficiently. The report concluded that the technology was sound but that opportunities existed to improve use of the network and administration in such a way as to better safeguard state assets. The audit report made several recommendations, the most significant of which related to better definition of goals and objectives and contractual terms to protect the state’s interests. Figure 1 provides a summary of the BSA recommendations.

Recent Legislation Applies BSA Recommendations to HSN. Chapter 552, Statutes of 2006 (AB 1228, Daucher), addressed each of the BSA audit recommendations relating to the HSN project. Specifically, it requires ICOE to define goals and objectives, increase usage of the network, create a methodology by which to evaluate the success of HSN, and report back to the Legislature by March 1, 2007. Additionally, Chapter 552 specifies provisions that must be in all future HSN contracts to protect the state’s interests, such as the assurance that interest earned on state monies will accrue to the state, protection of state intellectual property, and transparent fee structures. Chapter 552 did not address the state’s interests regarding monies paid to CENIC by UC, CSU, or CCC. For more detail on Chapter 552, see the nearby box.

In 2006-07, Legislature Conducts More Oversight of CalREN and HSN. In the 2006-07 Budget Act, the Legislature adopted Control Section 24.55 requiring CENIC to submit additional program documentation no later than December 1, 2006. Specifically, the report was to include service level agreements, details on assets purchased with state monies, documentation showing how interest earned on state monies was used, and information on fees charged to private clients. (See "2006-07 Budget Act Control Language" box for a more detailed listing of the control section requirements.) The Governor’s 2007-08 budget proposal does not contain this control section.

Chapter 552, Statutes of 2006 (AB 1228, Daucher) Chapter 552 established the K-12 High Speed Network (HSN). In doing so, it attempted to address several Bureau of State Audits (BSA) recommendations directly as well as provide the Imperial County Office of Education (ICOE) with the leverage to negotiate a contract with the Corporation for Education Network Initiatives in California (CENIC) that addressed remaining BSA recommendations. Below, we summarize the major provisions of the bill. Purpose: Enriching pupil educational experiences and improving pupil academic performance by providing high-speed, high-bandwidth Internet connectivity. Goals and Objectives: Defines high-level goals and objectives and requires the advisory board to define evaluation criteria for HSN and report back to the Legislature by March 1, 2007. Also requires implementation of videoconferencing and authorizes ICOE to oversee use grants as well as grants to connect unconnected schools. Directs ICOE to coordinate network use to benefit teaching and learning. Services: Internet service, interconnectivity among K-12 entities, connection to higher education institutes, connections to state and local agencies, videoconferencing, distance learning tools, and statewide coordination of network use. Administration: A competitively selected local educational agency (LEA) administers the network on behalf of the Superintendent of Public Instruction. An advisory board, primarily composed of county and school district representatives, will meet quarterly to provide policy and operational guidance. Oversight: Fiscal oversight provided by an annual independent audit. Technical oversight provided by an independent evaluation to be completed by March 1, 2009. Requires ICOE to submit annual budget request to the Department of Finance. Contract Requirements: The ICOE must include the following in all contracts they enter into: a service level agreement, protection of intellectual property ownership rights, asset protection, documentation of appropriate fee structures, and assurance that any interest earned on state funds are used to the benefit of the project.

Enhanced Transparency and Contractual Improvements Should Be Applied to All Education Segments

We recommend the Legislature further protect state interests by enacting legislation that would extend the major provisions of Chapter 552 to the higher education segments. In addition, we recommend the Legislature request the Corporation for Education Network Initiatives in California to provide more information on its assets and fee structure by April 1, 2007, consistent with the intent of Section 24.55 of the 2006-07 Budget Act.

2006-07 Budget Act Control Language Section 24.55 of the 2006-07 Budget Act, placed the following requirements on the Corporation for Education Network Initiatives in California (CENIC) and the Imperial County of Education: Ensure that any interest earned on state monies held by CENIC accrues to the segment providing the excess monies and is used to operate the California Research and Education Network (CalREN) for that segment. Create a service level agreement (SLA) for CalREN and the High Speed Network (HSN). Establish fee payment schedules that do not require prepayment. Submit a report to the Legislature and the Governor by December 1, 2006, with the following: — Information on revenues and expenses over $100,000 in 2005-06. — A financial accounting of all primarily state-funded assets for CalREN and HSN. — The SLA for CENIC. — A list of all prepayments made in 2005-06 and the first quarter of 2006-07 and an explanation of savings resulting from each. — Fees charged by CENIC to all private and out-of-state educational institutes using CalREN. — Revised budget for 2006-07 for CalREN and the HSN.

Chapter 552 addressed BSA audit concerns about the HSN project, but significant accountability issues still exist with regards to the higher education segments. We think the transparency, safeguards, and accountability provisions laid out in Chapter 552 for the HSN project should be extended to the higher education segments. Ideally, the Legislature would make these improvements in a bill, though it also could adopt a budget control section (as was done in 2006-07).

State Monies From All Education Segments Should Be Protected. Chapter 552 protects state assets and interests by requiring specific terms be included in the contract between K-12 and CENIC. This will not, however, protect state monies paid to CENIC on behalf of, or assets acquired by, UC, CSU, or CCC. We believe contracts between CENIC and each of these systems should have the same provisions that Chapter 552 required for the K-12 project. We recommend legislation (or control language) that requires each segment, no later than January 1, 2008, to negotiate contracts (or contract amendments, as appropriate) with CENIC that include the five contract terms required in Chapter 552.

CENIC Has Yet to Provide Required Information on State-Funded Assets. Although CENIC submitted a detailed report on December 1, 2006, as required by Section 24.55 of the 2006-07 Budget Act, it did not provide the requested information about state-funded assets or its fee structure. The control language required a “financial accounting of all primarily state-funded assets associate[d] with CalREN and HSN.” In response, CENIC provided a list of all assets, without dollar values or information about ownership, and separately provided a total dollar value of shared assets, claiming that determining which of these shared assets was primarily state-funded is difficult. CENIC did provide a total dollar value for nonshared state assets but no inventory or supporting documentation. CENIC should be required to provide the required level of asset information to protect the state’s property. If CENIC were to cease managing the project the state would need an accurate inventory of state-funded assets.

CENIC Has Yet to Provide Required Information on Fee Structures. The control language also asked CENIC to provide a list of fees charged to out-of-state and private members. The intent of this request was to asses whether California entities are paying a “fair” price compared to other members and ensure state monies are being used to provide services to state entities, not to subsidize smaller private organizations. CENIC complied with the request by providing the name and total annual revenue earned from each of the seven out-of-state and private members in 2005-06. While this list met the letter of the request, it did not satisfy the intent of the request. The annual revenues from these seven members varies from a low of $62,000 to a high of $1.4 million, all of which are much lower than California’s public members pay annually. CENIC should be required to provide more transparency on its fee structure. Specifically, it should show how fees are calculated for each member and how interest earnings reduce fee levels that otherwise would be charged. This information would help the Legislature determine if fees are being applied consistently to all members for services provided. We recommend that CENIC report these items to the Legislature by April 1, 2007.

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