April 24, 2003 Minutes

Fifteen of the nineteen members were present, representing a quorum:

Bryant, Anne - by telephone

Jackson, Jimmy – Secretary

Buller, Karen - by telephone

Jortner, Wayne – Treasurer

Conn, David

Lubin, Joel – Vice Chair – by telephone

Cornell, Diane

Parrino, Cheryl

Eichler, Ed

Sanders, Dr. Jay

Gumper, Frank – Chair

Sanford, Jo Anne – by telephone

Hess, Kevin

Talbott, Dr. Brian

Hughes, Alison

Three members joined the meeting in progress:

Campbell, Anne

Rivera, Robert

Coltharp, James

Officers of the Corporation present:

Name

Company

Alco, John

USAC

Carroll, Kristy

USAC

Davis, Ta’Nea

USAC

Gallant, Pam

USAC

Garnett, Paul

FCC

Howard, Cathy

USAC

Majcher, Karen

USAC

Marshall, Debra

USAC

Miller, Linda

USAC

Panton, Marci

NECA

Scott, Wayne

USAC

Trew, Anne Marie

USAC

a1.

Approval of the Minutes. On a motion duly made and seconded, the Board approved the minutes as distributed of the meeting of Thursday, January 23, 2003.

Board member Ms. Campbell joined the meeting during the following item.

a2.

Reports from the Committee Chairs. Each of the Chairs of the programmatic Committees reported on issues discussed and action taken within each Committee since the January 2003 quarterly meetings, respectively: Mr. Eichler reported on the Audit Committee meetings of April 17 and 23, 2003; Mr. Hess reported on the High Cost & Low Income Committee meeting of April 23, 2003; Dr. Sanders reported on the Rural Health Care Committee meeting of April 23, 2003; Dr. Talbott reported on the Schools & Libraries Committee meetings of March 28, 2003 and April 14 and 23, 2003; and Mr. Gumper reported on the Executive Committee meetings of April 1 and 17, 2003. The minutes of each Committee meeting provide a full accounting of the discussions and actions taken by the Committees.

In addition, Dr. Talbott discussed an FCC order approved on April 23, 2003, in which the FCC takes steps to improve the operation of the Schools and Libraries Universal Service Support Mechanism, while improving oversight over the support mechanism.

Dr. Talbott then requested an opportunity to report in Executive Session on a matter discussed at the April 23, 2003, Schools & Libraries Committee meeting. 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 this item involves discussion of the details of specific participants’ requests for universal service support, the disclosure of which in open session would compromise program integrity and/or reveal trade secrets or commercial or financial information obtained from the specific applicant.

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

RESOLVED, That the USAC Board of Directors determines that discussions of pending Schools and Libraries Support Mechanism applications shall be conducted in Executive Session.

See Executive Session for a report of the discussion on this item.

a3.

Approval of the Audit Committee Charter. Mr. Scott, Director of USAC Internal Audit, recalled for the Board that the USAC Audit Committee had presented the Audit Committee Charter to the Board at its January 23, 2003, meeting, but that the Board requested revisions. Mr. Scott reported that in accordance with Board direction, revisions have been made regarding the roles and responsibilities of the Committee, budgetary authority of the Committee, and the attendance policy for Executive Sessions of the Committee. Mr. Scott reviewed item number V.A.3. of the Charter regarding the attendance policy. The Board determined to keep the item numbered V.A.3. in the Charter but DIRECTED that the words’ “FOR DISCUSSION” be struck.

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

RESOLVED, That the USAC Board of Directors accepts the USAC Audit Committee’s recommendation to approve the proposed revised Audit Committee Charter.

a4.

Approval of Universal Service Contributor Revenue Data Collection Contract – Confidential & Proprietary – Executive Session. In accordance with the approved criteria and procedure for conducting USAC Board and Committee business in Executive Session, Mr. Barash explained that this matter should be conducted in Executive Session because discussion of this matter, which relates to USAC’s procurement strategy and contract negotiations, and public disclosure of the matters discussed in this paper 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 its agreement with NECA to perform the universal service contributor revenue data collection shall be conducted in Executive Session.

See Executive Session for a report of discussion and action taken on this item.

Board member Mr. Coltharp joined the meeting during the following item:

a5.

Approval of the 3rd Quarter 2003 and Revised 2003 Annual USAC Common and Consolidated Budgets. Mr. Carmichael explained that staff is recommending an increase in the annual budget to cover expenses associated with responding to the recent Congressional inquiry regarding the Schools and Libraries Support Mechanism and that the increase in the 3rd Quarter 2003 budget compared to 3rd Quarter 2002 is due to transitioning the billing, collection, and disbursement functions in-house.

Members of the Board expressed concern over the increasing consolidated budget. Mr. Carmichael explained that some of the costs of the transition of the billing, collection, and disbursements functions in-house are one-time costs and that recurring costs for the function are estimated at $5 million per year. However, he stated that USAC’s goal is to bring down those costs over time as USAC staff becomes more familiar and proficient at performing this service. Mr. Gumper reassured the Board that USAC staff carefully assesses the options for processing each component of the universal service support mechanisms and evaluates both the short- and long-term costs of performing work in-house versus outsourcing. He also reminded the Board that when USAC first started business it did not do all the tasks it does today. He noted, for example, that USAC’s costs associated with audits have increased considerably over time, which has driven up the budget considerably. In response to an inquiry regarding USAC office space and rent, Mr. Haga explained that the USAC Space Team investigated purchasing a building rather than leasing, but that in order to justify buying over leasing, USAC would need to find a building in which it could occupy a substantial portion of the building, and USAC is not big enough to do that yet.

The Board’s concerns regarding the rising administrative budget led the Board to DIRECT USAC staff to: (1) closely monitor every budget change, making special note of those increases that are a result of specific FCC action, and (2) continue to present changes to the budget to the Board for approval as the directives occur rather than estimating costs of possible changes and adding them to the budget before the directive has been given.

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 revised annual 2003 USAC common budget of $10,484,600; and

RESOLVED FURTHER, That the USAC Board of Directors accepts the recommendation of the USAC Executive Committee to approve a 3rd Quarter 2003 USAC common budget of $3,639,900; and

RESOLVED FURTHER, That the USAC Board of Directors accepts the recommendation of the USAC Executive Committee to approve a revised annual 2003 USAC consolidated budget of $63,945,600; and

RESOLVED FURTHER, That the USAC Board of Directors accepts the recommendation of the USAC Executive Committee to approve a 3rd Quarter 2003 USAC consolidated budget of $16,566,400.

a6.

Approval of 3rd Quarter 2003 Revenue Projections and Resolutions for the May 30, 2003, FCC Filing. Mr. Carmichael reported that consistent with staff expectations, the contribution factor for the 3rd Quarter 2003 is projected to increase from the 9.1 percent 2nd Quarter 2003 figure.

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 April 24, 2003, a summary of the current status of the May 30, 2003, FCC filing requirements, accepts the recommendation of the USAC Executive Committee to authorize staff to proceed with the required May 30, 2003, filing to the FCC on behalf of USAC using a preliminary estimate of $18,655.081 million for the contribution base. Staff may make adjustments in accordance with the approved $1.25 billion variance threshold.

a7.

Strategic Planning Input from Board Members. Mr. Gumper deferred this item until the last item of the meeting. See below after Executive Session.

a8.

Board of Directors Governance Matters – 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 discussion of this matter be conducted in Executive Session because discussion of specific internal controls, and/or confidential company data could result in disclosure of confidential techniques and procedures that would compromise the integrity of the administration of the universal service support mechanisms. In addition, certain matters discussed in this document relate to USAC’s procurement strategy and contracts, and public disclosure of the matters discussed in this paper would compromise USAC’s procurement strategy to the detriment of the corporation and the Universal Service Fund. Moreover, certain matters discussed in this document implicate the attorney-client privilege and, therefore, should not be discussed in open session in order to maintain the continued applicability of the 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 certain matters regarding corporate governance and corporate fiduciary duties shall be conducted in Executive Session.

See Executive Session for a report of discussion and action taken on this item.

a9.

Miscellaneous.

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

RESOLVED, That the USAC Board of Directors determines that discussion of entering into negotiations for office space in Washington, DC shall be conducted in Executive Session.

See Executive Session for a report of discussion and action taken on this item.

i1.

Assistant Treasurer’s Report. Mr. Carmichael explained that USAC closes its financial books the fifth working day following the end of the month, so that at the time this issue paper was written, the books had not been closed yet for the first quarter, so the report provides numbers as of February 28, 2003. He further stated that the upcoming implementation of the Debt Collection Improvement Act (DCIA) on July 1, 2003, could positively affect the Fund balance. He explained that under the DCIA, USAC would transfer uncollectible accounts over 90 days to the FCC for collection and then on to the Treasury Department after another 30 days if still outstanding, and ultimately to the Department of Justice for final collection efforts. Mr. Carmichael said that delinquent carriers will be notified of the new collection process before implementation and he anticipates that the letters alone will result in a reduction in the number of delinquent accounts. He further stated that in over 99 percent of delinquent cases, USAC has been able to collect the outstanding funds within 180 days. A Board member asked Mr. Carmichael whether the DCIA applies only to carrier delinquencies or if it also applies to USAC’s efforts to recover overpayment because of applicant or other error. Mr. Carmichael responded that the initial implementation contemplated only contribution delinquencies; however he said that staff has been and would continue its discussions of this issue with the FCC.

i2.

Status of IBM Billing, Collection, and Disbursement Contract. Mr. Carmichael reported that the transition of the billing, collection, and disbursements functions in-house is on schedule and within budget. He stated that Phase I was completed on April 14 as scheduled. He said that the FCC has requested that a status report on this issue be sent to the FCC by May 1, 2003. He reiterated that the risks are significant and assured the Board that staff is making every effort to mitigate those risks.

i3.

Report of Legislative and Media Activity. Mr. Blackwell reported that USAC has responded in full to the U.S. House of Representatives Committee on Energy and Commerce, Subcommittee on Investigations and Oversight inquiry concerning the Schools and Libraries Support Mechanism. He said that USAC staff remains available to members of the Congressional committee to answer questions regarding the material provided to the committee. In accordance with the approved criteria and procedure for conducting USAC Board and Committee business in Executive Session, Mr. Barash recommended that certain details of this matter be discussed in Executive Session because discussion of specific requests for Schools and Libraries Support Mechanism funding, and discussion of internal controls, and/or confidential company data could result in disclosure of confidential techniques and procedures, would compromise the integrity of the administration of the universal service support mechanisms.

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

RESOLVED, That the USAC Board of Directors determines that discussion of certain matters regarding USAC’s response to the U.S. House of Representatives Committee on Energy and Commerce, Subcommittee on Investigations and Oversight’s, inquiry concerning the Schools and Libraries Support Mechanism shall be conducted in Executive Session.

See Executive Session for a report of discussion on this item.

Mr. Blackwell also reported that the Senate Commerce Committee Subcommittee on Communications held a hearing on the current state of the Universal Service Fund on April 2, 2003. Mr. Blackwell said that media interest has been steady but low regarding these issues.

i4.

Regulatory Report. For information only. No discussion held.

i5.

Report on Pending Litigation and Bankruptcy Matters. Mr. Barash informed the Board of two new items. First, on April 22, 2003, USAC received a notice of a lawsuit related to the bankruptcy of Actel. Mr. Barash said that this case is similar to other matters that USAC has been able to resolve successfully. Second, Mr. Barash reported that on April 23, 2003, USAC received a copy of a subpoena addressed to Arthur Andersen LLP that seeks certain information regarding audits of USAC performed by Arthur Andersen in 1999 and 2000. Mr. Barash said that the underlying litigation in this matter appeared to be a class action lawsuit against certain telecommunications providers concerning the Universal Service Fund charges assessed against their customers. He said that USAC staff is working through the issue with both counsel for Arthur Andersen and counsel for the plaintive. Mr. Barash said that he would keep the Board informed on both matters as circumstances warranted.

i6.

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

i7.

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

i8.

Board of Directors Survey Results and Proposed Staff Response. For information only. No discussion held.

i9.

Miscellaneous. None.

Report of the Financial Audit of the FCC for the Year Ending September 30, 2002. Ms. Parrino noted that this year, as in past years, the FCC has received a clean audit opinion regarding the Universal Service Fund from the FCC’s independent auditors. However, she stated that there are two issues that have recurred in these reports since the FCC began including the USF in the FCC financial statements: (1) To what extent is the Fund considered public monies and for what purpose, and (2) What accounting rules should be followed by the Fund? Mr. Gumper said that presently FCC rules mandate that USAC use Generally Accepted Accounting Principles (GAAP).

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

i12.

Status Report on Actions Taken on Final Audits. For information only. No discussion held.

Review of the Revised 2003 USAC Internal. For information only. No discussion held.

Review of the Revised Annual 2003 and 3rd Quarter 2003 Programmatic Budgets. For information only. No discussion held.

Review of 3rd Quarter 2003 High Cost, Low Income, Rural Health Care, and Schools and Libraries Support Mechanisms Projections for the May 2, 2003, Demand Estimate Filing with the FCC. For information only. No discussion held.

Seventeen of the nineteen members were present, representing a quorum:

Bryant, Anne

Hughes, Alison

Buller, Karen

Jackson, Jimmy – Secretary

Campbell, Anne

Jortner, Wayne – Treasurer

Coltharp, James

Lubin, Joel – Vice Chair – by telephone

Conn, David

Parrino, Cheryl

Cornell, Diane

Sanders, Dr. Jay

Eichler, Ed

Sanford, Jo Anne – by telephone

Gumper, Frank – Chair

Talbott, Dr. Brian

Hess, Kevin

One member joined the meeting in progress:

Rivera, Robert

One member was absent:

Davis, Fr. Bill

a9.

Miscellaneous.

i3.

Report of Legislative and Media Activity – Confidential & Proprietary – Executive Session. Mr. Blackwell and Mr. Barash answered questions and discussed the materials that were presented to the U.S. House of Representatives Committee on Energy and Commerce, Subcommittee on Investigations and Oversight, in response to an inquiry concerning the Schools and Libraries Support Mechanism.

a4.

Approval of Universal Service Contributor Revenue Data Collection Contract – Confidential & Proprietary – Executive Session. Mr. Carmichael reviewed the options and recommended course of action for the data collection agent function performed by USAC through a contract with NECA.

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

RESOLVED, That the USAC Board of Directors accepts the recommendation of the USAC Executive Committee and approves extending the current contract or entering into a new contract with the National Exchange Carrier Association, Inc., to perform support services associated with universal service contributor revenue data collection, for a term ending on December 31, 2004.

Board member Mr. Rivera joined the meeting during discussion of the following item.

a8.

Board of Directors Governance Matters – Confidential & Proprietary – Executive Session. The Board had a discussion on corporate governance matters and corporate fiduciary duties, and requested that USAC staff seek further legal advice regarding these matters.

The Chair called a recess at 11:17 a.m. At the call of the Chair, the Board reconvened in Executive Session at 11:21 a.m.

a2.

Reports from the Committee Chairs – Confidential & Proprietary – Executive Session. Dr. Talbott reported on the status of certain outstanding Schools and Libraries Support Mechanism applications. Board members Mr. Conn and Mr. Rivera recused themselves due to potential business conflicts with the applicants under discussion and left the room during the discussion.

a7.

Strategic Planning Input from Board Members. Mr. Haga asked that the Board members divide themselves into three groups for group discussions and input on USAC strategic planning.