October 22, 2002 Minutes

Thirteen of the nineteen members were present representing a quorum (there is one vacancy):

Bryant, Anne

Jackson, Jimmy - Secretary

Campbell, Anne

Jortner, Wayne

Conn, David

Lineberry, Isiah - by telephone

Cornell, Diane

Parrino, Cheryl

Eichler, Ed - Treasurer

Sanders, Dr. Jay - by telephone

Gumper, Frank - Chair

Talbott, Dr. Brian

Hess, Kevin

Three members joined the meeting in progress:

Buller, Karen

Rivera, Robert

Lubin, Joel – Vice Chair

Two members were absent:

Coltharp, James

Davis, Fr. Bill

Officers of the Corporation present:

Barash, D. Scott - Assistant Secretary; Vice President & General Counsel

Blackwell, Mel - VP, External Communications & Rural Health Care Division

Carmichael, Mark - Assistant Treasurer; VP, Finance & Financial Operations

Flannery, Irene – VP, High Cost and Low Income Division

Haga, Robert - VP, Strategic Planning & USAC Operations

McDonald, George - VP, Schools & Libraries Division

Name

Company

Anderson, Bob

NECA

Bond, Don

Public Service Telephone Company

Chaney, Ross

NITI

Davis, Craig

USAC

Davis, Ta’Nea

USAC

Faunce, Donna

USAC

Gallant, Pam

USAC

Gill, Charlie

NSI

Khan, Sameer

USAC

Howard, Cathy

USAC

Majcher, Karen

USAC

Miller, Linda

USAC

Parry, John

NECA

Pendergrass, Pierre

Spectrum Communications

Scott, Wayne

USAC

Trew, Anne Marie

USAC

Webber, Sharon

FCC

a1.

Approval of the Minutes. On a motion duly made and seconded, the Board approved the minutes as distributed of the meetings of Tuesday, July 23, 2002, and Friday, October 4, 2002.

a2.

Reports from the Committee Chairs. Each of the Chairs of the programmatic Committees reported on the issues discussed and the action taken at each of their October 2002 quarterly Committee meetings, respectively: Dr. Talbott – Schools & Libraries Committee; Dr. Sanders – Rural Health Care Committee; Mr. Eichler – High Cost & Low Income Committee; and Mr. Gumper – Executive Committee. See the minutes of each Committee meeting for a full accounting of the discussions and actions taken by the Committees.

Mr. Gumper informed the Board that the Board would need to have a special meeting in December to elect new Board members. The meeting will be scheduled as soon as approval of Board appointments is received from the FCC.

a3.

Photo Shoot. Mr. Blackwell was unable to make it to the meeting in person to take pictures of the Board of Directors for the USAC Annual Report. A photo shoot will be scheduled during the January 2003 quarterly meeting. In addition, Mr. Blackwell requested each Board member to send a suitable photograph of him or herself to him, if available.

a4.

Appointment of a Nominating Committee and Direction to Committees for the Appointment of Committee Chairs and Committee Vice-Chairs. Ms. Parrino reminded the Board that annual officer and committee elections occur at each January quarterly meeting of the Board pursuant to USAC’s By-laws. She explained that, if appointed, the Nominating Committee would be tasked with two responsibilities: (1) Bring to the Board at its January 2003 quarterly meeting nominations for the officer positions of the Board, and (2) bring to the Board at its anticipated December 2002 special Board meeting recommendations for Committee assignments for the anticipated new Board members. In addition, staff recommended that the Board task each programmatic committee with bringing to the Board at its January 2003 quarterly meeting nominations for committee Chairs and Vice Chairs.

On a motion duly made and seconded, the Board adopted the following resolutions:

RESOLVED, That the USAC Board of Directors establishes a Nominating Committee for the purpose of recommending to the USAC Board of Directors at its January 2003 meeting nominations for the elected USAC officer positions and to bring to the USAC Board of Directors at the anticipated December 2002 special Board meeting recommendations for Committee appointments for new Board members; and

RESOLVED FURTHER, That the USAC Board of Directors appoints Mr. Robert Rivera as Nominating Committee chair and Ms. Anne Bryant and Mr. Kevin Hess and as members of the Nominating Committee; and

RESOLVED FURTHER, That the USAC Board of Directors directs each Committee of the USAC Board of Directors to bring to the Board of Directors at its January 2003 meeting nominations for a chair and vice-chair of each respective Committee.

a5.

Approval for Reimbursing a Board Member to Attend an Event Other Than a USAC Board or Committee Meeting or Event. Ms. Parrino reviewed the recommendation to approve a request being made by the USAC Treasurer, Mr. Eichler, for reimbursement from USAC for expenses he would incur for a trip to Chicago to meet with one of USAC’s financial services vendors, Bank One, in conjunction with the 2002 quarterly Investment Committee meeting there on November 14. She reminded the Board that it approved a similar request for Mr. Eichler in April 2002 when he traveled to Chicago to meet with USAC’s other financial services vendor, LaSalle Bank, in May 2002 and that the expenses he submitted for that trip stayed within his estimated expenses.

On a motion duly made and seconded, the Board adopted the following resolution:

RESOLVED, That in accordance with the “Procedures for Requesting Approval and Reimbursing a Member of the Board of Directors for Expenses Incurred in Conducting USAC Business other than Board of Directors Meetings” approved by the USAC Board of Directors, the USAC Board of Directors authorizes the Corporation to reimburse the USAC Treasurer, Mr. Ed Eichler, for expenses incurred by him to visit USAC’s investment banker, Bank One, in Chicago on November 14, 2002, in connection with the quarterly USAC Investment Committee meeting on the same date.

a6.

Biennial Review and Approval of USAC Employee Ethical Standards. Ms. Parrino explained that she is required to report to the USAC Board of Directors every two years on the adequacy of and compliance with the USAC employee ethical standards, and to suggest revisions as needed. She reported that in her judgment the standards have been adequate and that there have been only minor instances of non-compliance, which were quickly addressed and resolved. Ms. Parrino reported that, in consultation with the General Counsel, they used discretion in resolving an ethical issue involving a baby gift to an employee. Finally, she noted that USAC staff is recommending a few minor clarifications as well as correcting a typographical error in the standards. Ms. Parrino informed the Committee that USAC’s General Counsel would be presenting a training session on the ethics policy and compliance issues with USAC staff at the November monthly meeting of USAC staff.

In response to an inquiry from the Board, Ms. Parrino explained in those circumstances where it would be rude to refuse a gift due to cultural norms, the employee may accept the gift on behalf of USAC, but such a gift is made available to the entire staff or a lottery is held for non-management employees of USAC. A Board member suggested that the federal government’s policy regarding gifts from a foreign government might be useful in cases where a USAC employee receives a gift from a Native American stakeholder group.

On a motion duly made and seconded, the Board adopted the following resolution:

RESOLVED, That the USAC Board of Directors accepts the recommendations of the Executive Committee to modify the “Statement of Ethical Conduct for Employees,” “Definition of Gifts Prohibited,” “Definition of Financial Interest,” “Outside Employment,” and “Acceptance of Payment from Outside Sources for USAC Employees’ Travel Expenses” documents as recommended by staff to clarify when it is appropriate for USAC employees to accept reimbursement of travel expenses from an outside source and to make minor corrections and modifications as noted by USAC staff.

a7.

Selection of the Audit Firm to Conduct a Large Scale Audit of Schools and Libraries Support Mechanism Beneficiaries and Authorization to Engage the Firm for the Audit – Confidential & Proprietary – Executive Session. In accordance with the approved criteria and procedure for conducting USAC Board and Committee business in Executive Session, Mr. Barash recommended that this matter be discussed in Executive Session because discussion and public disclosure of this matter at this time, which relates to USAC’s procurement strategy and contract negotiations, would compromise USAC’s negotiation strategy to the detriment of the corporation and the Universal Service Fund.

On a motion duly made and seconded, the Board adopted the following resolution:

RESOLVED, That the USAC Board of Directors determines that discussion of the proposals to select an audit firm to conduct a large scale audit of Schools and Libraries Universal Service Support Mechanism beneficiaries for USAC shall be conducted in Executive Session.

See Executive Session for a report of the discussion and action taken.

a8.

Approval to Enter into Negotiations for Office Space in Washington, D.C. – Confidential & Proprietary – Executive Session. This item was withdrawn from the agenda.

Board member Mr. Lubin joined the meeting during the discussion of the next item.

a9.

Approval of the 1st Quarter 2003 USAC Consolidated and Common Budgets and Information on Estimated 2003 Annual Budget. Ms. Parrino reported that the estimated 2003 annual budget is slightly less than one percent above the 2002 actual budget. She reported that this budget is the product of an effort to limit expenditures only to essential items. She explained that USAC staff is not recommending leasing new office space in Washington, DC at this time, as the necessary increase in budget would not be prudent in light of the state of the telecommunications industry, the questions surrounding the universal service contribution base, and USAC’s overall mandate to minimize administrative expenses. She assured the Committee that even though space is crowded now in the Washington office, there is still enough workspace for all employees, and that additional temporary space may be procured during 2003 if necessary to accommodate the addition of five new employees. Ms. Parrino also reported that staff is requesting only the minimum number of new positions in response to specific operational requirements, and that several proposed positions recommended by staff have not been included in the budget.

Ms. Parrino noted that USAC is anticipating that the FCC may issue several decisions related to the operations of the fund that could dramatically affect the budget. She said that the proposed budget did not contain any contingencies to address those potential changes because a meaningful estimate of the costs cannot be provided at this time. She recommended that the Board of Directors address such items as they occur during the course of the year rather than trying to predict the administrative changes that may be required in 2003. She remarked that USAC staff has verbally informed the FCC of the potential financial impacts of proposed changes where sufficient details have been provided to make such an estimate. Mr. Gumper informed the Board that contribution methodology changes are expected from the FCC in November; in which case the Executive Committee would then meet to approve any budget changes.

A revised Attachment F was distributed. Ms. Parrino explained and reviewed additional detailed information concerning the proposed budget for the Board, focusing particularly on comparisons of historic annual administrative expenses with the proposed quarterly and annual budgets.

A Board member asked whether Congress knew how well USAC is doing keeping administrative costs down, particularly as compared to the amount of disbursements, a typical measure of efficiency for non-profits. Mr. Gumper responded that it is difficult to devise a comparison that can adequately offset any perception that USAC’s administrative costs are so low only because the fund as a whole is so large. He said that USAC staff is looking into other types of comparisons that would indicate the efficiency of USAC such as how much USAC spends on processing forms compared to other government agencies. Mr. Blackwell assured the Board that USAC continues to meet with Congressional members at their request to keep them informed of the status of USAC’s operations.

On a motion duly made and seconded, the Board adopted the following resolutions:

RESOLVED, That the USAC Board of Directors accepts the recommendation of the USAC Executive Committee to approve a 1st Quarter 2003 USAC common budget of $1,612,300; and

RESOLVED FURTHER, That the USAC Board of Directors accepts the recommendation of the USAC Executive Committee to approve a 1st Quarter 2003 USAC consolidated budget of $13,113,100.

a10.

Approval of 1st Quarter 2003 Revenue Projections and Resolutions for the December 2, 2002, FCC Filing. Mr. Carmichael reported that the recently completed annual true-up of contributor revenue information reported on FCC Form 499-A with information reported quarterly on FCC Form 499-Q produced a variance of approximately $80 million that results in prior period adjustments to first quarter 2003 in the form of funding requirement decreases. He noted that there has been a dramatic decrease in the number of Form 499-Qs distributed due either to companies choosing to file on a consolidated basis or to USAC closing accounts of non-respondents. The following documents were distributed at the meeting: revised pages 4 and 5 of the issue paper reflecting a typo correction to the resolution and revised Attachment B reflecting updated numbers. Mr. Carmichael concluded that although the revenue base has grown since the inception of USAC, it has decreased in recent quarters.

On a motion duly made and seconded, the Board adopted the following resolution:

RESOLVED, That the USAC Board of Directors, having reviewed at its meeting on October 22, 2002, a summary of the current status of the December 2, 2002, FCC filing requirements, accepts the recommendation of the USAC Executive Committee to authorize staff to proceed with the required December 2, 2002, filing to the FCC on behalf of USAC using a preliminary estimate of $19,210.299 million for the contribution base. Staff may make adjustments in accordance with the approved $1.25 billion variance threshold.

a11.

Feedback on Timing of Board Materials. Ms. Parrino held a discussion with the Board on the process of preparing and distributing the quarterly Committee and Board meeting materials. She explained that the materials this time were sent out almost a week earlier than in the past. Several Board members expressed appreciation for the extra time they had to review the materials. Ms. Parrino said that she would be sending out a survey to the Board before the next quarterly meeting to solicit their ideas on the usefulness of the materials being prepared. She encouraged the Board members to contact her if they have any suggestions on how to improve the process or materials they receive for the meetings.

a12.

Miscellaneous.

• Board Attendance Policy. Mr. Gumper withdrew this item from the agenda. He asked that this issue be included on the agenda for the January 2003 Board meeting.

• Adoption of a Resolution Honoring Ms. Camie Swanson-Hull. Ms. Parrino reviewed the proposed resolution and letter commemorating the service on the USAC Board of Directors of Ms. Camie Swanson-Hull, who resigned from the Board effective October 1, 2002.

On a motion duly made and seconded, the Board adopted the following resolutions:

RESOLVED, That the USAC Board of Directors hereby expresses its appreciation for the service Ms. Camie Swanson-Hull has provided to the Universal Service Administrative Company and wishes her the best in her future endeavors; and

FURTHER RESOLVED, That the USAC Board of Directors directs staff to send a letter of commendation signed by the Board Chair and the CEO to Ms. Swanson-Hull.

i1.

USAC Internal Audit Status Report on USAC Audits. For information only. No discussion held.

i2.

Assistant Treasurer’s Report. Mr. Carmichael introduced the newest member of the USAC Finance Division staff, Ms. Anne Marie Trew, Director of Billing and Collections. He then gave his assistant treasurer report stating that the balance attributable to the support mechanisms was approximately $2.6 billion at the end of August 2002 and that he anticipates approximately the same level with a slight decrease over the next few quarters as the excess Schools and Libraries Support Mechanism funds are used to maintain the contribution factor at 7.2805 percent as required by FCC order.

i3.

Report on Accounts Receivable Delinquent Over 30 Days and Collection Efforts. Mr. Carmichael reported that the “Days Sales Outstanding” continue to decrease as do the number of delinquent accounts due mainly to improved collection efforts and tighter controls over the collection process. He verified that WorldCom, a substantial contributor to the Universal Service Fund that is currently in bankruptcy, continues to stay current in its payments to USAC. He noted that per the Board’s request at the July quarterly meeting, additional data on the total amount billed versus total amount owed by industry type has been added to Attachment B. In response to an inquiry from a Board member as to how the uncollectible factor affects the contribution factor, he explained that the uncollectible factor is reviewed every year based on USAC’s history and is taken into account by the FCC when determining the collection factor. Mr. Gumper went on to say that USAC is working with the FCC to determine the extent to which USAC will take advantage of the Debt Collection Improvement Act, which would allow USAC to transfer uncollectible accounts at some point to the FCC books and then those accounts would be transferred to the Treasury Department, and ultimately the Department of Justice would enforce collection. Mr. Carmichael verified that USAC does impose and collect late payment fees in accordance with Board direction.

i4.

Report on Pending Litigation and Bankruptcy Matters. Mr. Barash reported that there has been significant activity in USAC’s bankruptcy-related litigation in the third quarter and reviewed the details of several cases. He said that bankruptcies overall have leveled off somewhat both in the numbers and filing amounts. Of those bankruptcy cases that have been settled, USAC is receiving some payments.

Mr. Barash said that USAC staff has confidential updates on USAC’s litigation strategy and in accordance with the guidelines regarding Executive Session approved by the USAC Board of Directors, he recommended that the updates be discussed in Executive Session because this item concerns pending litigation matters that are subject to the attorney-client privilege and discussion of this item in open session would compromise the continued applicability of the attorney-client privilege.

On a motion duly made and seconded, the Board adopted the following resolution:

RESOLVED, That the USAC Board of Directors determines that discussion of an update on pending litigation to which USAC is a party shall be conducted in Executive Session.

See Executive Session for a report of this discussion.

i5.

Update on Universal Service Support Mechanisms Enforcement Activity. For information only. No discussion held.

i6.

Disposition of Administrator Appeals by USAC Staff. For information only. No discussion held.

i7.

Regulatory Report. For information only. No discussion held.

i8.

Report of Legislative and Media Activity. For information only. No discussion held.

i9.

Status of Support Services for USAC provided by PricewaterhouseCoopers, LaSalle Bank, and NECA. Mr. Carmichael reported that one of USAC’s financial services vendors, PricewaterhouseCoopers (PwC), was acquired by IBM Corporation effective September 30, 2002, and is now part of IBM Consulting. Mr. Carmichael reported that IBM receives a significant amount of Schools and Libraries Support Mechanism funding as a provider of internal connections services and USAC staff is taking steps to address any actual, potential, or perceived conflict of interest. USAC and IBM staff are working to further tighten controls and more explicitly document the checks being used so that any appearance or real conflict of interest can be appropriately addressed. Mr. Carmichael also reported that the financial accounting services being provided by IBM have stabilized after an initial period of significant quality control issues. USAC has devoted significant resources toward ensuring proper controls are in place and that the quality of the work fully meets USAC’s needs. USAC staff continues to closely monitor the situation and will reevaluate IBM’s performance again at the end of this year. At that time, USAC staff will determine whether it is more appropriate to bring the financial accounting service operations in-house. Finally, Mr. Carmichael reported that per Board approval, USAC has extended the current contract with NECA for one year to continue performing support services associated with universal service contributor revenue data collection.

Mr. Barash said that USAC staff has confidential information to report on an internal audit that USAC performed on the financial services being provided by PwC and that in accordance with the approved criteria and procedure for conducting USAC Board and Committee business in Executive Session, he recommended this matter be discussed in Executive Session because discussion of specific audit plans, internal controls, and/or confidential company data would result in disclosure of confidential techniques and procedures that would compromise program integrity.

On a motion duly made and seconded, the Board adopted the following resolution:

RESOLVED, that the USAC Board of Directors determines that discussion of specific internal audit findings shall be conducted in Executive Session.

See Executive Session for a report of this discussion.

i10.

USAC Acronyms, Forms, and Frequently Asked Questions. Ms. Parrino noted that the three documents provided in this item are information that the Board previously requested.

i11.

USAC Timeline and Key Dates. For information only. No discussion held.

i12.

Miscellaneous. None.

i13.

High Cost and Low Income Support Mechanisms Update. For information only. No discussion held.

i14.

Report on the Implementation of the Interstate Common Line Support Mechanism (ICLS). For information only. No discussion held.

i15.

Review of the 1st Quarter 2003 High Cost and Low Income Programmatic Budgets and Information on Estimated 2003 Annual Budget. For information only. No discussion held.

i16.

Review of 1st Quarter 2003 High Cost and Low Income Support Mechanisms Projections and Resolution on the November 1, 2002, FCC Filing. For information only. No discussion held.

i17.

Rural Health Care Support Mechanism Update. For information only. No discussion held.

i18.

Review of 1st Quarter 2003 Rural Health Care Programmatic Budget and Information on Estimated 2003 Annual Budget. For information only. No discussion held.

i19.

Review of 1st Quarter 2003 Rural Health Care Support Mechanism Projections and Resolution on the November 1, 2002, FCC Filing. For information only. No discussion held.

i20.

Schools and Libraries Support Mechanism Update. For information only. No discussion held.

i21.

Review of the 1st Quarter 2003 Schools and Libraries Programmatic Budget and Information on Estimated 2003 Annual Budget. For information only. No discussion held.

i22.

Review of 1st Quarter 2003 Schools and Libraries Support Mechanism Projections and Resolution on the November 1, 2002, FCC Filing. For information only. No discussion held.

Sixteen of the nineteen members were present (there is one vacancy), representing a quorum:

Name

Company

Bryant, Anne

Jackson, Jimmy – Secretary

Buller, Karen

Lineberry, Isiah – by telephone

Campbell, Anne

Lubin, Joel – Vice Chair

Conn, David

Parrino, Cheryl

Cornell, Diane

Rivera, Robert

Eichler, Ed – Treasurer

Sanders, Dr. Jay – by telephone

Gumper, Frank – Chair

Talbott, Dr. Brian

Hess, Kevin

Two members were absent:

Coltharp, James

Davis, Fr. Bill

a7.

Selection of the Audit Firm to Conduct a Large Scale Audit of Schools and Libraries Support Mechanism Beneficiaries and Authorization to Engage the Firm for the Audit – Confidential & Proprietary – Executive Session. Mr. Scott provided an overview of the selection process for an independent accounting firm to perform this audit, and explained how the evaluation team rated the proposals and arrived at the recommendation of KPMG LLP. He clarified that the evaluation team scored the technical piece of each proposal before reviewing the pricing component.

On a motion duly made and seconded, the Board adopted the following resolution:

RESOLVED, That the USAC Board of Directors authorizes USAC to select the independent accounting firm of KPMG LLP to conduct an audit of beneficiaries of the Schools and Libraries Universal Service Support Mechanism for funding year 2000, with an option to renew for up to three additional years, pending agreement on final terms and conditions of the engagement.

i4.

Report on Pending Litigation and Bankruptcy Matters. Mr. Barash reviewed pending litigation matters.

i9.

Status of Support Services for USAC provided by PricewaterhouseCoopers, LaSalle Bank, and NECA. Mr. Gumper informed the Board of the results of an internal audit that USAC performed on the financial services being provided by PricewaterhouseCoopers.