July 22, 2003 Minutes

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

Bryant, Anne

Hess, Kevin

Buller, Karen - by telephone

Jackson, Jimmy – Secretary

Campbell, Anne

Jortner, Wayne – Treasurer

Conn, David

Lubin, Joel – Vice Chair

Cornell, Diane

Parrino, Cheryl

Davis, Fr. Bill

Sanders, Dr. Jay – by telephone

Eichler, Ed

Sanford, Jo Anne

Gumper, Frank – Chair

Talbott, Dr. Brian

One member joined the meeting in progress:

Coltharp, James

Hughes, Alison

Rivera, Robert

Officers of the Corporation present:

Name

Company

Davis, Ta’Nea

USAC

Franklin, Karen

FCC

Gallant, Pam

USAC

Howard, Cathy

USAC

Miller, Linda

FCC

Panton, Marci

USAC

Parry, John

NECA

Scott, Wayne

USAC

Stevenson, Mark

Send Technologies LLC

a1.

Approval of the Minutes. On a motion duly made and seconded, the Board approved the minutes as distributed of the USAC Board of Directors meeting of Thursday, April 24, 2003.

a2.

Reports from the Committee Chairs. Each of the Chairs of the USAC programmatic Committees reported on issues discussed and action taken within each Committee since the April 2003 quarterly meetings: Mr. Eichler reported on the Audit Committee meetings of July 17 and 23, 2003; Mr. Hess reported on the High Cost & Low Income Committee meetings of June 24 and July 21, 2003; Mr. Jackson on behalf of Dr. Sanders reported on the Rural Health Care Committee meeting of July 21, 2003; Dr. Talbott reported on the Schools & Libraries Committee meetings of June 12, June 20, July 11, and July 21, 2003; and Mr. Gumper reported on the Executive Committee meeting of July 17, 2003. Dr. Talbott noted that the action taken on July 11 by the Schools & Libraries Committee needs to be reconsidered by the Committee and that they would do so today after the Board meeting. The minutes of each Committee meeting provide a full accounting of the discussions and actions taken by the Committees.

Dr. Talbott then requested an opportunity to report in Executive Session on a matter discussed at the July 21, 2003, Schools & Libraries Committee meeting regarding Schools and Libraries Support Mechanism applications under review. 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 a matter of investigatory records or pending or contemplated enforcement action against participants of the universal service support mechanisms, the disclosure of which could compromise law enforcement efforts.

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

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

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

a3.

Action on USAC 2002 Financial Audit and Agreed Upon Procedures Review. Ms. Parrino introduced this item and said that the USAC Audit Committee approved the recommendations to the USAC Board of Directors at its quarterly meeting on July 21, 2003. Ms. Parrino noted that USAC received a clean audit opinion on its financial statements and that there were no major findings in the agreed upon procedures (AUP) review. Mr. Eichler pointed out that the USAC Board is not provided with an opportunity to review a “clean” copy of the audit reports before they go to the FCC and requested that the Board direct the auditors to send the USAC Board a “clean” copy for review next year before it is submitted to the FCC. The Board so DIRECTED. Mr. Eichler also requested that the USAC Board direct USAC staff to determine if it would be more efficient and practical to combine the management response with filed report rather than as a separate attachment. The Board so DIRECTED.

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 Audit Committee and directs that the USAC 2002 financial audit report as submitted by Deloitte & Touche LLP be deemed final; and

RESOLVED FURTHER, That the USAC Board of Directors accepts the recommendation of the USAC Audit Committee and directs that the USAC 2002 agreed upon procedures review report as submitted by Deloitte & Touche LLP be deemed final; and

RESOLVED FURTHER, That the USAC Board of Directors accepts the recommendation of the USAC Audit Committee and authorizes the USAC CEO to submit a management response to Deloitte & Touche LLP, with a copy to the FCC, accepting the USAC 2002 financial audit report and agreed upon procedures review report and committing to take the actions necessary to address the issues that were identified in the agreed upon procedures review report; and

RESOLVED FURTHER, That the USAC Board of Directors accepts the recommendation of the USAC Audit Committee and authorizes Deloitte & Touche LLP to file the final USAC 2002 financial audit report and agreed upon procedures review report with the FCC.

a4.

Approval of the Procedures for Referring Issues to the USAC Audit Committee. Mr. Eichler introduced this item and reminded the Board that it was brought to the attention of the USAC Audit Committee at its April 17, 2003, quarterly meeting that USAC needed procedures for referring issues to the Audit Committee. He said that the Audit Committee modified the procedures presented by USAC staff to state that reports on issues referred to the Committee will be provided to the USAC Board of Directors “as appropriate.” Mr. Eichler confirmed that (a) anyone may submit the form referring an issue to the Audit Committee; (b) instructions for filing a form are included in the procedures and on the “Request for USAC Audit Committee Review” form; and (c) these procedures were established primarily for internal parties to refer issues; however, when appropriate, issues may also be sent to the Committee via the whistleblower hotline or other means.

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 Audit Committee and approves the “Procedures for Referring Issues to the Audit Committee” and the “Request for Audit Committee Review” form as presented by the Audit Committee, and further directs the USAC Audit Committee to use the procedures and request form in handling issues that are referred to the Committee. USAC staff is authorized to make minor editorial changes to the procedures and form before finalizing.

a5.

Assignment of the Rural Health Care and Schools and Libraries Support Mechanisms Services Agreement – 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 item be conducted in Executive Session because this matter relates to USAC’s procurement strategy and contract negotiations, and public disclosure of this matter would compromise USAC’s negotiation strategy to the detriment of the corporation and the Universal Service Fund. Moreover, certain of these matters implicate the attorney-client privilege and, therefore, should not be discussed in open session.

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 assignment of the Rural Health Care and Schools and Libraries Program Services Agreement with the National Exchange Carrier Association, Inc. to NECA Services, Inc. (NSI) shall be conducted in Executive Session.

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

a6.

Approval of Revised USAC Funds Guidelines for Investments. Mr. Carmichael introduced this item and explained that the USAC Investment Committee had reviewed and revised the Guidelines at its May 13, 2003, quarterly meeting. Ms. Parrino clarified that the revisions will conform the Guidelines to USAC’s investment policies for the last two years, which is to invest in U.S. Government-backed securities only. The revisions also eliminate the limitation to short-term maturities contained in the current Guidelines, which will allow USAC to invest in maturities greater than one year but less than two.

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 Investment and Executive Committees to adopt the revised USAC Funds Guidelines for Investments as presented by USAC staff and further directs the USAC Treasurer and Assistant Treasurer to adhere to the revised Guidelines in managing the Universal Service Fund.

a7.

Authorization to Negotiate Payment Agreements with Contributors. Mr. Carmichael introduced this item and noted that a revised issue paper was distributed to the Board. Mr. Gumper explained that at its July 17, 2003, quarterly meeting, the USAC Executive Committee determined to revise the recommendation to the Board by reducing the budgeted estimated costs of the payment plan effort from $500,000 to $250,000.

On a motion duly made and seconded, the Board adopted the following resolutions, as amended (in italics):

RESOLVED, That the USAC Board of Directors authorizes USAC staff to enter into payment plans with delinquent Universal Service Fund contributors under established criteria as directed by the FCC; and

RESOLVED FURTHER, That the USAC Board of Directors authorizes USAC staff to proceed with related expenditures of an estimated $500,000 $250,000 to cover the costs of implementing contributor payment plans as directed by the FCC. A budget increase in 2003 for this activity will not be required due to the fact that USAC is under budget in other areas.

a8.

Approval of the 4th Quarter 2003 USAC Common and Consolidated Budgets and the Revised 2003 Annual Consolidated Budget. Mr. Carmichael introduced this item and presented the final budget numbers for consideration. Mr. Gumper explained that the budget numbers are different from what the USAC Executive Committee reviewed and approved at its July 17, 2003, quarterly meeting due to a $1,000,000 budget increase approved by the USAC Schools & Libraries Committee at its July 21, 2003, quarterly meeting to cover the costs of converting Program Integrity Assurance (PIA) temporary employees to permanent, consolidating the FCC Form 471 review steps, and adding Schools and Libraries Division staff in order to be able to meet certain Schools and Libraries Support Mechanism performance criteria for Funding Year 2004.

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 consolidated budget of $64,970,600, and

RESOLVED FURTHER, That the USAC Board of Directors accepts the recommendation of the USAC Executive Committee to approve a 4th Quarter 2003 USAC consolidated budget of $16,991,600; and

RESOLVED FURTHER, That the USAC Board of Directors accepts the recommendation of the USAC Executive Committee to approve a 4th Quarter 2003 USAC common budget of $3,397,200.

a9.

Approval of 4th Quarter 2003 Revenue Projections and Resolutions for the August 29, 2003, FCC Filing. Mr. Carmichael introduced this item. There were no questions or further discussion.

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 July 22, 2003, a summary of the current status of the August 29, 2003, FCC filing requirements, accepts the recommendation of the USAC Executive Committee to authorize staff to proceed with the required August 29, 2003, filing to the FCC on behalf of USAC using a preliminary estimate of $18,695.147 million for the contribution base. Staff may make adjustments in accordance with the approved $1.25 billion variance threshold.

a10.

Board of Directors Governance Matters – Confidential & Proprietary – Executive Session. Mr. Barash explained that the USAC Board of Directors previously directed USAC staff to seek legal advice from outside counsel concerning certain corporate governance and corporate fiduciary duties issues and that legal advice is now ready for Board review. In accordance with the approved criteria and procedure for conducting USAC Board and Committee business in Executive Session, Mr. Barash recommended that discussion of these matters regarding corporate governance and corporate fiduciary duties be conducted in Executive Session in order to ensure the continued applicability of the attorney-client privilege.

A Board member questioned the rationale for Executive Session, stating that the legal advice contained in the memo is more a prospective analysis of how to operate as a corporation rather than specific advice pertaining only to USAC. The Board then discussed this matter. Ms. Parrino noted that the Board has been following the guidelines for Executive Session since the Board approved the guidelines in October 2002 and that previous discussions concerning legal advice regarding corporate governance issues have been conducted in Executive Session. Ms. Bryant called for the vote.

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 the discussion and action taken on this item.

a11.

Miscellaneous.

• Solicit Ideas for July Committee Agenda. Mr. Gumper reminded Board members that they may offer suggestions for agenda items at each quarterly meeting or by contacting him or Ms. Parrino between quarterly meetings.

i1.

Assistant Treasurer’s Report. Mr. Carmichael reported that the balance of the Universal Service Fund (USF) continues to be approximately $2.4 billion. He noted that the estimated collection requirement for the USF was less than the actual amount billed to carriers due to the FCC directing USAC staff to round up to two digits on the billing invoices compared to the four digits that USAC staff uses when estimating the collection requirement. He said that the over collection would be included in the prior period true-up for each of the support mechanisms in the fourth quarter 2003 USAC filing with the FCC.

Mr. Carmichael reported that interest rates continue to be low (in the 1 percent range) but now that the Board has approved the revisions to the USAC Funds Guidelines for Investments as noted in item a6 above, USAC will be investigating longer-term investments, which should realize better returns.

Mr. Carmichael informed the Board that USAC expects to be directed to convert the USF’s accounting system from the current Generally Accepted Accounting Practices (GAAP) to Government Accounting and Auditing Standards perhaps as early as next year. He further clarified that the USF is subject to Government Accounting and Auditing Standards but that USAC is only subject to GAAP. In response to a Board member’s concern, Ms. Parrino assured the Board that the difference in the two systems should not cause significant inefficiencies.

i2.

Report on Accounts Receivable Delinquent Over 30 Days and on Collection Efforts. For information only. No discussion held.

i3.

Status of Financial Operations Transition to USAC. Mr. Carmichael reported that the transition of the billing, collection, and disbursements functions from contractor personnel to USAC staff is going well. Phase 1 is complete and Phases 2-7 are on or ahead of schedule. He said that 30 new employees were hired during the last quarter, with 3 positions left to fill. Mr. Carmichael reported that the caliber of the new employees have exceeded USAC management’s expectations. In addition, he reported that USAC staff favorably negotiated a modification to the financial services contract with USAC’s current vendor, resulting in an approximately $1,000,000 savings, thereby allowing USAC to offset other programmatic budget needs.

i4.

Report of Legislative and Media Activity. Mr. Blackwell reported that USAC staff continues to provide information to the U.S. House of Representatives Committee on Energy and Commerce, Subcommittee on Investigations and Oversight (Subcommittee) regarding the Subcommittee’s inquiry concerning the Schools and Libraries Support Mechanism. He said that the Subcommittee has now requested information from approximately 15 service providers. Mr. Blackwell believes that a hearing will be scheduled for sometime in September 2003, but that the date and type of hearing has yet to be determined. Mr. Gumper observed that the Subcommittee has expressed interest in the results of the audits of the 75 Schools and Libraries Support Mechanism beneficiaries when those audits are completed. Mr. Gumper stated his opinion that the Subcommittee likely will view these audit results as a clear indication of the level of waste, fraud, and abuse in the Schools and Libraries Support Mechanism. Ms. Parrino pointed out that USAC agreed to perform the audits according to Government Auditing Standards, and to use findings of “compliant,” “partially compliant,” and “noncompliant” consistent with the FCC Office of Inspector General’s categories, thereby allowing for some errors without rejecting the beneficiary as a whole.

i5.

Outreach Plan and Report. For information only. No discussion held.

i6.

Regulatory Report. For information only. No discussion held.

i7.

Report on Pending Litigation and Bankruptcy Matters. For information only. No discussion held.

i8.

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

i9.

Review of Strategic Planning Framework. Mr. Haga reviewed the new brochure outlining USAC’s Strategic Planning Framework that was created using the input given by the Board members, USAC staff, and stakeholders. He said that he plans to have staff begin working on the action plan needed to complete the goals outlined in the framework either towards the end of this year or the beginning of next year. He stated that the process is dynamic and that he welcomes input at any time from the Board members. The Board offered three points of input regarding the brochure: (1) include more information about what USAC does – internal connections for schools and libraries, facilitate delivery of health care to rural areas, etc.; (2) emphasize the cost efficiencies more; and (3) ensure that the goals are distinguishable from what USAC has already accomplished.

i10.

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

i11.

Miscellaneous. None.

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

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

Review of the Revised Annual 2003 and 4th Quarter 2003 Programmatic Budgets. For information only. No discussion held.

Review of 4th Quarter 2003 High Cost, Low Income, Rural Health Care, and Schools and Libraries Support Mechanisms Projections for the August 1, 2003, Demand Estimate Filing with the FCC. For information only. No discussion held.

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

Bryant, Anne

Hess, Kevin

Buller, Karen

Jackson, Jimmy – Secretary

Campbell, Anne

Jortner, Wayne – Treasurer

Cornell, Diane

Lubin, Joel – Vice Chair

Davis, Fr. Bill

Parrino, Cheryl

Eichler, Ed

Talbott, Dr. Brian

Gumper, Frank – Chair

One member joined the meeting in progress:

Coltharp, James

Sanford, Jo Anne

Conn, David

One member was absent:

Hughes, Alison

Sanders, Dr. Jay

Rivera, Robert

Officers of the Corporation present:

Barash, D. Scott – Vice President and General Counsel

Blackwell, Mel – VP, External Communications and Rural Health Care Division

Carmichael, Mark – Assistant Treasurer; VP, Finance and Financial Operations

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

Haga, Robert – Assistant Secretary; VP, Strategic Planning and USAC Operations

McDonald, George – VP, Schools and Libraries Division

Others present for the meeting:

NAME

COMPANY

Davis, Ta’Nea

USAC

Howard, Cathy

USAC

Miller, Linda

USAC

Scott, Wayne

USAC

a5.

Assignment of the Rural Health Care and Schools and Libraries Support Mechanisms Services Agreement – Confidential & Proprietary – Executive Session. Ms. Parrino introduced this item. Mr. Gumper explained the history of this agreement with the National Exchange Carrier Association, Inc. (NECA). Dr. Talbott informed the Board that at its July 21, 2003, quarterly meeting, the USAC Schools & Libraries Committee approved this assignment but amended the resolution to include a stipulation that some of the management employees who would be assigned by NECA Services, Inc. (NSI) be NSI employees. Mr. Jackson informed the Board that at its July 21, 2003, quarterly meeting, the USAC Rural Health Care Committee also approved the assignment as well as the amendment being recommended by the Schools & Libraries Committee, and further amended the resolution to include a directive to USAC staff to negotiate some performance incentive plans for the Rural Health Care portion of the agreement similar to the performance incentive plans in place for the Schools and Libraries portion of the agreement. The Board concurred.

On a motion duly made and seconded, the Board adopted the following amended resolution (amendments in italics). Mr. Hess abstained.

RESOLVED, That the USAC Board of Directors accepts the recommendation of the USAC Rural Health Care and USAC Schools & Libraries Committees and authorizes the USAC CEO to assign the Rural Health Care and Schools and Libraries Program Services Agreement between USAC and the National Exchange Carrier Association, Inc. (NECA), to NECA Services, Inc. (NSI), subject to mutual agreement on modifications to the current Agreement reflecting the terms and conditions of the assignment, and provided that some of the management employees assigned to this agreement be NSI employees, and provided that USAC staff negotiates performance incentive plans for the Rural Health Care portion of the agreement similar to the performance incentive plans in place for the Schools and Libraries portion of the agreement.

a10.

Board of Directors Governance Matters – Confidential & Proprietary – Executive Session. Mr. Barash introduced this item and clarified that USAC management is not recommending any action on this matter at this time. The Board reviewed and discussed the legal advice provided by outside counsel regarding corporate governance issues, and concluded that the Board should continue its current approach of providing Board members with confidential information concerning USF operations, unless there is a serious conflict of interest.

a2.

Reports from the Committee Chairs. Dr. Talbott reported on the status of certain Schools and Libraries Support Mechanism applications that are under review and led a discussion with the Board on this matter. No action was taken.