With E‑rate 2.0 Still Sinking In, E‑rate 2.1 Has Arrived for 2015

Tony Wilhelm is Vice President for Government-Supported Programs at Affiniti.  For two decades Tony has been a leader in education technology, as an executive in USAC’s E‑rate program as well as running a $4 billion broadband grant program that has connected thousands of K-12 schools across the country.  Tony works with Affiniti clients to optimize their E‑rate and Telehealth initiatives.

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In my last white paper, I boiled down the 176-page July 2014 rule changes (what I call E‑rate 2.0), concentrating on five seismic changes that will impact school districts and libraries where it matters most—in their wallets.  This white paper picks up with the changes set in motion in the December 2014 FCC Order (what I will call E‑rate 2.1).  Raising the E‑rate cap to $3.9 billion represents a historic and overdue adjustment to E‑rate funding. To take full advantage of these new funds, ed-tech decision makers need to understand this latest wave of changes because the 2015 E‑rate funding season has arrived. Especially if you are intending to upgrade your last-mile facilities, this paper zeroes in on new E‑rate 2.1 rules that may save you money, increase flexibility and broaden your options in meeting your future broadband needs.

student with a notebook computerThe most important thing to keep in mind is that, while most of the E‑rate 2.1 changes won’t go into effect until the 2016 funding year, they may still impact your current decision making if you are planning on an infrastructure upgrade this year.  Rather than tossing the Order into a bottom drawer for future reading, ed-tech leaders should appreciate what’s on the horizon in 2016.

E‑rate 2.1 may well reduce your out-of-pocket and overall nonrecurring costs significantly. Here’s how. In 2016, E‑rate applicants will have additional flexibility in four main areas:

  • Installment options for non-discounted nonrecurring charges over multiple years
  • Equal treatment of lit and dark fiber
  • Self-construction options for schools and libraries
  • A higher discount percent to match support from state sources for special construction

I will flesh out each of these below but, to skip to the punch line, I highly encourage E‑rate participants to review the contents of E‑rate 2.1 so they can gauge its impact on their current 2015 strategy. Some districts and libraries may decide to wait until these new rules take shape. Others may need to act right away.  With state assessments looming and other digital learning implementation plans on hold for lack of ultra-fast connections, some districts and library systems can’t delay. One consortium plowing ahead is the The New Jersey Digital Readiness for Learning and Assessment, helping school districts add much-needed capacity via aggregating purchasing as they brace to administer the PARCC assessments for the 2015–16 school year.  Familiarity with the E‑rate 2.1 elements described below will provide additional tools to decision-makers as they further invest in their last-mile broadband infrastructure.

Suspension of Amortization Requirements Big Incentive for Capital Projects in 2015
Before I review the 2016 changes, E‑rate 2.1 provides one important tool for applicants who might be undertaking large-scale construction projects during the current funding cycle. If you are upgrading your wide area network, for example, from wireless to fiber and outlaying $500,000 or more in nonrecurring costs, you will no longer be required to amortize those charges over at least three years. E‑rate 2.1 suspends these amortization requirements, allowing for upfront payback for construction costs.  A $750,000 construction project in 2015 can now be reimbursed in full for the discounted portion of the costs.

students sitting in a semi-circle around a teacher, using technology in the classroomFront-loading these expenses effectively eliminates two barriers to jump-starting capital-intensive projects.  First, it significantly reduces the time in which costs are reimbursed which is clearly more attractive from a business perspective.  Second it reduces the uncertainty built into the E‑rate program.  Rather than having to reapply in year 2 and year 3 to receive partial reimbursement and risk some hiccup in the process, the reimbursement now comes in full during the same funding year in which services are requested.

Additional Changes Effective in 2016 Sure to Drive Investment in High-speed Broadband
Let me briefly summarize the changes slated to be available for applicants beginning in the 2016 funding year to inform ed-tech leaders’ last-mile upgrade plans.  It is worth pointing out that only 65% of public schools and 15% of libraries have access to high-speed broadband that can be scaled up to meet the new connectivity targets.  Given E‑rate has historically covered capital costs for broadband infrastructure under its rules, these statistics suggest a major disconnect in the ability of applicants to take advantage of what in FCC jargon are called “special construction” opportunities.  E‑rate 2.1 is aimed at closing that gap.

Installment Payments for Nonrecurring Charges for High-speed Broadband
With the non-discounted costs for special construction charges, applicants can now post a 470 requesting that they have the flexibility to pay their share of nonrecurring costs for category 1 services in installments over a period up to four years.  The 470 is important because ultimately an applicant and service provider must come to terms on a payment plan that works for both parties.  Given the applicant cost for large special construction projects has been identified as a major barrier to undertaking capital-intensive projects, flexibility on these arrangements is likely to have a positive impact on districts’ ability to upgrade their infrastructure to meet a future in which bandwidth demand is skyrocketing.

nodes and segments, close upEqual Treatment of Lit and Dark Fiber
Currently lit fiber options are favored over dark fiber solutions in that E‑rate reimburses for recurring costs equally but only covers modulating electronics and special construction for lit services beyond a school or library’s property line.  Starting in 2016, E‑rate 2.1 rules will level the playing field.  E‑rate applicants will have greater flexibility in exploring dark-fiber solutions. The big catch is that applicants must show that price is the primary factor in selecting a winning bid by bidding out a solution for lit fiber services as well as for dark fiber.  This side-by-side comparison will allow applicants to determine which solution is truly the more cost effective.

Self-Construction of High-speed Facilities
Increased flexibility and greater options beginning in funding year 2016 will also allow for self-construction to allow schools and libraries to own all or some of their network to meet their connectivity needs as long as it is the most cost-effective solution. Where applicants have not received competitive responses to a Form 470 and accompanying RFP, the self-construction option may prove beneficial where bids are evaluated based on the total cost of ownership over the useful life of the facilities. With the self-construction option, facilities must be built and used within the same funding year.

Infrastructure Projects Can Begin and Be Billed Before Start of Funding Year
Because the purpose of special construction projects is to ensure K–12 schools and libraries have affordable and scalable high-speed broadband to meet their digital learning needs, E‑rate 2.1 codifies the policy allowing for category 1 infrastructure costs to be incurred and invoiced six months prior to the beginning of the funding year. Of course, an applicant must still select a vendor through the 470 process and cannot move up the start date for recurring services before July 1—but otherwise this opportunity will offer applicants a head-start in delivering more bandwidth to their schools and libraries before the start of the school year.

Additional Discount to Match State Funding for Special Construction
This change could be very consequential for schools and libraries building last-mile facilities if state agencies are able to step up and contribute toward helping E‑rate applicants meet their future bandwidth needs.  Beginning in 2016, E‑rate 2.1 stipulates that when states contribute toward the non-discounted portion of special construction charges, the E‑rate program will match state funding on a one-to-one basis by increasing an applicant’s discount rate up to an additional 10 percent.  As the example below shows, an applicant with an 80% discount who is investing in a $750,000 capital investment for an all-fiber WAN could save as much as $150,000 if a state agency were to contribute 10 percent of the project costs with the expectation that the federal government (E‑rate) would match its investment on a one-to-one basis up to the 10 percent mark.  Applicants and ed-tech associations should start coordinating with applicable state agencies now to maximize the chances that funds are available beginning in 2016 to take advantage of this matching opportunity. Even in cash-strapped states, matching programs are often received very favorably because they have a multiplier effect in leveraging limited state resources.

Putting It All Together
The sum total of the changes in E‑rate 2.1 related to build out of high-speed broadband translate into potential cost savings, greater flexibility and increased options for E‑rate applicants beginning this year—and expanding greatly in funding year 2016.

Let’s put some of these E‑rate 2.1 changes together and see what’s possible. Say a school district needs to upgrade some of its WAN connections to an all-fiber WAN in order to meet the long-term broadband targets described in E‑rate 2.0.  Let’s say for sake of illustration that the nonrecurring cost is $750,000 and the district has an 80 percent discount level.  Under the old rules, the district would be scurrying to come up with $150,000 upfront to pay its vendor.  In addition, the $600,000 in reimbursable expenses for the discounted portion would be spread equally over at least 3 funding year. Needless to say, these requirements were huge disincentives and major barriers to growth in high-speed broadband infrastructure.  As the chart shows (below), E‑rate 2.1 can help save money and expand the slate of options available to school districts and libraries as they strive to meet their digital learning needs.

Old E‑rate Rules E‑rate 2.1 Opportunities
Payment of Discounted Construction Costs $600K amortized over three years $600K reimbursed upfront
Payment of Non-Discounted Construction Costs $150K due from applicant up front $150K in installment payments up to 4 years or as agreed-upon terms and conditions
Added Discount and Match 80% discount often meant prohibitive upfront payment from applicant If state were to contribute 10 percent, applicant share would go to zero, potentially saving $150K
Dark Fiber and Self-Construction Options Not an option which made construction landscape less competitive These options might reduce the cost of the build through increasing competitive options or through self-construction

Undoubtedly the additional funding for E‑rate beginning in 2015, including the added flexibility to undertake last-mile infrastructure projects, will lead to additional scrutiny from program auditors and overseers, especially in validating that applicants have selected the most cost-effective choices and are using program funds efficiently.  With its unrivaled in-house E‑rate expertise and stable of program experts, Affiniti has deep experience in government-supported programs, such as E‑rate, with over $170 million in approved funding to date.  We see tremendous opportunity with the E‑rate 2.1 improvements and, at the same time, deeply appreciate the need for strong program compliance so that applicants receive the funding they deserve.  In that spirit, this blog highlights some of the important changes to navigate in order to take full advantage of the E‑rate program.

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