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Call It The ‘Universal Slush Fund’

The Universal Service Fund is a $7 billion federal program in search of a purpose.

Politicians and lawmakers don’t know exactly what they want to do with the money they collect from millions of American telephone bills every year, but they know one thing: They don’t want to stop collecting it. So they are bound and determined to find something to do with all that cash — probably something involving broadband, because broadband is strategic and cool and, well, everyone needs broadband.

The program, established in 1997, currently is used mainly to defray the cost of telephone service in rural areas, where the cost of providing service is higher due to greater distances between customers. This subsidy used $4.3 billion of the USF’s total budget of $7.3 billion in 2009. The USF is also used to subsidize local telephone service for low-income people, to provide affordable high-tech communications services to rural health care providers, and to support Internet service providers that offer discounted rates to schools and libraries. All of these services are paid for by the funds raised from telephone companies, which in turn pass the costs on to consumers.

As criticism mounts over the fact that large telephone companies are the biggest beneficiaries of the USF (though if the point is to deliver vital services, it seems irrelevant that large companies are the ones delivering them), the Federal Communications Commission and Congress have both sought to reform the fund. Reform, however, does not appear to encompass the words “eliminate” or “reduce.”

Last winter the FCC suggested that some of the USF money going into the high-cost program should instead be used to subsidize broadband costs in rural areas. The recommendation was part of the FCC’s National Broadband Plan, which seeks to dramatically increase the percentage of the population with high-speed Internet access.

In September the FCC released an Order and Notice of Proposed Rulemaking, seeking to force Sprint and Nextel to live up their 2008 commitments to give up universal service support, initially made in order to gain approval for a merger. In addition to pressuring compliance, the order asserted that the money would be used, not to support other companies providing telephone service in rural areas, but to increase funding for broadband programs.

The House Energy and Commerce Communications Subcommittee is now also considering diverting USF funds to broadband subsidies. The proposed Universal Service Reform Act of 2010 would require recipients of USF money to provide broadband service throughout the areas where they receive universal service support. The bill would also expand the types of companies required to pay into the USF to include Voice over Internet Protocol (VoIP) providers and all providers that offer network connections to the public. Despite the expansion of the contributor base, it is not surprising that broadband providers are largely in favor of the bill, while telephone service providers are primarily opposed. Just as the large phone companies benefited by passing USF fees on to their customers and then collecting USF subsidies to deliver services, broadband providers hope to gain hordes of newly subsidized customers while transferring the costs to the existing client base.

Certainly access to communications systems, both 20th century and 21st century, is critical to economic success. And it is at least arguably true that, without subsidies, connectivity would be more expensive for residents of rural areas than for urban dwellers. (But I wish someone would explain why electricity and traditional telephone service cost me twice as much in densely populated suburban New York City as the rates at our vacation home in rural Vermont.)

Still, assuming communications costs are higher in the country, it does not necessarily follow that urban residents ought to be responsible for helping out those who are farther flung.

Every region has advantages and disadvantages that make some things cheaper and other things more expensive. In urban areas, for example, the same population density that makes telecommunications relatively cheap makes things like parking spaces relatively expensive. Nobody has suggested that rural Americans should kick in some money when they buy, register or fuel their cars so Manhattanites can park at rates comparable to those available in the country. If rural residents truly find the costs of unsubsidized telecommunications to be intolerably high, there is nothing to prevent them from moving to more populous regions.

The FCC argues that subsidies are necessary because the entire country suffers when large numbers of residents are cut off from communications. The FCC seems to be forgetting that prior to 1997, houses in the country did indeed have telephones, running on wires that were installed and paid for long before the USF was established. And, as Internet connection becomes increasingly indispensable, rural communities are responding by discovering the best ways to connect in their neck of the woods, whether that means relying on satellites or setting up their own fiber-based broadband services, as is being done in the region around my Vermont place.

The USF’s use-it-don’t-lose-it rationale is a great argument for sunset provisions and zero-based budgeting. Programs, especially subsidies and other cost-shifting mechanisms, ought to come with expiration dates that force legislators to periodically reconsider their effectiveness. Without this recurring assessment, programs that may no longer be beneficial are simply taken for granted; reforms may be offered up, but the possibility of elimination doesn’t always make it to the table.

Programs that remain economically sensible, or even just politically popular (think “farm price supports”) would be renewed, while outdated programs might at least sometimes get weeded out.

The USF program ought to be a target for legislative herbicide. But money helps careers grow like fertilizer in Washington, D.C., and those who control this pot of our cash are busy looking for new fields over which to spread it.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s recently updated book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us,” and Chapter 4, “The Family Business.” Larry was also among the authors of the firm’s book The High Achiever’s Guide To Wealth.

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