October 21, 2003 Minutes

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

Buller, Karen – by telephone

Jortner, Wayne – Treasurer

Campbell, Anne

Lubin, Joel – Vice Chair

Cornell, Diane

Parrino, Cheryl

Davis, Fr. Bill

Rivera, Robert – by telephone

Eichler, Ed

Sanders, Dr. Jay – by telephone

Gumper, Frank – Chair

Sanford, Jo Anne

Hughes, Alison

Talbott, Dr. Brian

Jackson, Jimmy – Secretary

Two directors joined the meeting in progress:

Bryant, Anne – by telephone

Coltharp, James

Hess, Kevin

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

Name

Company

Byrd, Vickie

FCC

Dawson, Theron

USAC

Howard, Cathy

USAC

Krzos, Joe

USAC

McLaren, Kirk

USAC

Miller, Linda

USAC

Foskett, Ken

Atlanta Journal-Constitution

Scott, Wayne

USAC

Trew, Anne Marie

USAC

a1.

Approval of the Minutes. On a motion duly made and seconded, the Board approved the revisions to the minutes of Monday, December 16, 2002, as distributed, and approved the minutes of July 22, 2003, as distributed.

Board member Ms. Bryant joined the meeting at this point.

a2.

Reports from the Committee Chairs. Each of the Chairs of the USAC programmatic Committees reported on issues discussed and action taken by each Committee since the July 2003 quarterly meetings: Mr. Eichler reported on the Audit Committee meetings of September 30 and October 16 and 20, 2003; Mr. Lubin, at the request of Mr. Hess, reported on the High Cost & Low Income Committee meetings of August 19 and October 20, 2003; Dr. Talbott reported on the Schools & Libraries Committee meetings of July 22, August 13, September 17 and 30, and October 20, 2003; Mr. Gumper reported on the Executive Committee meetings of August 29 and October 16, 2003; and Dr. Sanders reported on the Rural Health Care Committee meeting of October 20, 2003. In addition, Dr. Sanders announced to the Board that he has been invited to attend a speech by Chairman Powell on November 7 at the University of Virginia. He noted that it is possible that Chairman Powell will discuss issues concerning the Rural Health Care Support Mechanism that will be addressed by the Commission in WC Docket 02-60.

The minutes of each Committee meeting provide a full accounting of the discussions and actions taken by the Committees.

a3.

Appointment of a Nominating Committee and Direction to Committees for the Appointment of Committee Chairs and Committee Vice-Chairs. Mr. Gumper explained that a special meeting of the Board would be required sometime in December after the FCC Chair has announced the appointments to the Board to fill the vacancy left by Mr. David Conn and the six Board terms that expire the end of this year. Ms. Parrino introduced the item. There was no further discussion.

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 2004 meeting nominations for the elected USAC officer positions and to bring to the USAC Board of Directors at the anticipated December 2003 special Board meeting recommendations for Committee appointments for new Board members; and,

RESOLVED FURTHER, That the USAC Board of Directors appoints Mr. Ed Eichler as Nominating Committee chair and Mr. James Coltharp and Ms. Diane Cornell 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 2004 meeting nominations for a chair and vice chair of each respective Committee.

a4.

Approval for Reimbursing a Board Member to Attend an Event Other Than a USAC Board or Committee Meeting or Event. Ms. Parrino introduced this item. She informed the Board that Mr. Jortner, USAC Treasurer and Investment Committee Chair, is requesting reimbursement for expenses to attend the November quarterly Investment Committee meeting at LaSalle Bank in Chicago, Illinois in person. In response to a question, she explained that even though the amount being requested for reimbursement is a small amount, according to FCC rules and Board policy, the resolution must come before the Board or appropriate Committee for approval. She noted that because the Investment Committee is not a formal Committee of the Board, the request was brought before the full Board for approval. A copy of the completed Request for Approval form is attached to these minutes per procedures.

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 and Chair of the Investment Committee, Mr. Wayne Jortner, for expenses incurred by him to visit USAC’s investment banker, LaSalle Bank, in Chicago on November 13, 2003, in connection with the quarterly USAC Investment Committee meeting on the same date.

a5.

Authorization to Appeal Adverse Bankruptcy Litigation Decision – 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 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 whether to appeal an adverse bankruptcy litigation decision shall be conducted in Executive Session.

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

a6.

Approval of 1st Quarter 2004 USAC Consolidated and Common Budgets and Information on Estimated 2004 Annual Budget. Mr. Carmichael introduced a new member of the USAC Finance Division, Mr. Theron Dawson, Financial Analyst II; Mr. Dawson is responsible for processing the payment plans for delinquent accounts. Mr. Carmichael then introduced this item and presented the final budget numbers for consideration. In response to a question, Mr. Barash explained that the increase in the budget for legal expenses is to cover costs for outside counsel separate from the litigation matter addressed in agenda item #a5. He said that litigation cases and USAC’s involvement continues to increase often requiring outside counsel coverage in distant parts of the United States in order to represent USAC in pending judicial proceedings, primarily in the bankruptcy area. In response to another question, Mr. Carmichael said that the Finance Division has added 42 full-time employees to perform the work previously outsourced to IBM.

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 2004 USAC common budget of $3,434,800; and

RESOLVED FURTHER, That the USAC Board of Directors accepts the recommendation of the USAC Executive Committee to approve a 1st Quarter 2004 USAC consolidated budget of $17,293,600.

a7.

Approval of 1st Quarter 2004 Revenue Projections and Resolutions for the December 2, 2003, FCC Filing. Mr. Carmichael introduced this item. The Committee DIRECTED USAC staff to provide charts in the future showing demand projections without prior period adjustments and then a chart showing prior period adjustments and separate out any adjustments that relate to one specific support mechanism so that such variances are easily distinguishable. Mr. Carmichael indicated that these charts would be an excellent way to show the Committee that if the contribution factor drops, it may not necessarily be due to demand going down but rather due to a unique prior period adjustment. Mr. Gumper requested that drafts of the charts be sent to Mr. Lubin and himself for review before finalizing.

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 21, 2003, a summary of the current status of the December 2, 2003, FCC filing requirements, accepts the recommendation of the USAC Executive Committee to authorize staff to proceed with the required December 2, 2003, filing to the FCC on behalf of USAC using a preliminary estimate of $18,724.968 million for the contribution base. Staff may make adjustments in accordance with the approved $1.25 billion variance threshold.

a8.

Adoption of a Resolution Honoring Mr. David Conn. Ms. Parrino introduced this item. There were no questions or discussion.

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

RESOLVED, That the USAC Board of Directors hereby expresses its sincere appreciation for the service Mr. David Conn has provided to the Universal Service Administrative Company and wishes him the best in his future endeavors; and

RESOLVED FURTHER, That the USAC Board of Directors directs the Board Chair and the CEO to send a letter Mr. David Conn expressing the Board’s appreciation for his service.

Board member Mr. Coltharp joined the meeting at this point.

a9.

Consideration of Whether to Provide Additional Materials to the USAC Board of Directors. Ms. Parrino introduced this item. Mr. Rivera clarified that he is not requesting copies of all communications between USAC and FCC, but only on specific policy issues. Mr. Gumper explained that most of the communications between USAC and the FCC is ongoing and said that a rough survey provided to the Board indicated a large number of documents per month are exchanged between the two entities, not including telephone conversations. He said that USAC practice has been for the USAC CEO and staff to determine what information is relevant and necessary for the USAC Board of Directors to see in order to carry out their fiduciary responsibilities without overwhelming them with paperwork; USAC management creates summaries of correspondence and conversations and presents them to the Board for review and action as appropriate. Other Board members noted that in some instances they might not actually want certain information due to possible conflicts of interest or in instances where the FCC requests confidentiality of information until after it has rendered a decision, and that they rely on and trust USAC management to determine when to present particular information to them. Ms. Parrino reassured the Board that she and other members of the management team have and will continue to bring all relevant issues to the Board and Committees as appropriate.

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

RESOLVED, That the USAC Board of Directors directs USAC management to continue its current practices regarding reporting issues discussed with the FCC concerning the administration of the universal service support mechanisms.

a10.

Elevation of the Position of Director of Internal Audit to Vice President – Internal Audit Division and Designation of the Position as an Officer of the Corporation. Ms. Parrino introduced this item. She said that Mr. Gumper asked her to do a rough analysis of the responsibilities of each vice president of the corporation and compare them to the responsibilities of the Director of Internal Audit. After reviewing the comparison, and consulting with Audit Committee Chair Mr. Eichler, that Mr. Gumper and Mr. Eichler concurred that the responsibilities of the Director of Internal Audit are now at the same level as a vice president within the corporation, thus, the position should appropriately be a vice president of the corporation.

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 and establishes the position of Vice President – Internal Audit Division; and

RESOLVED FURTHER, That the USAC Board of Directors accepts the recommendation of the USAC Executive Committee, consistent with resolutions adopted by the USAC Board of Directors at its April 23, 2002, meeting, designates the Vice President – Internal Audit as an officer position of the Corporation; and

RESOLVED FURTHER, That the USAC Board of Directors designates Mr. Wayne Scott, Vice President – Internal Audit Division, as an officer of the Corporation, subject to the terms and conditions set forth in resolutions adopted by the USAC Board of Directors at its April 23, 2002 meeting.

a11.

Approval of Board Member Annual Disclosure of Corporate or Entity Affiliations and Approval of Identification of Auditees to Board Members in Order to Mitigate Any Actual or Potential Conflict of Interest Issues. Mr. Barash introduced this item. Mr. Gumper clarified that the proposed disclosure form would only be used by USAC management to help directors determine if they may have a potential conflict of interest regarding any issues that may come before the Board. He reiterated that management would not automatically withhold information from a director based on what is identified on this disclosure form, but rather would use this opportunity to identify potential conflicts for the director and then contact the director to discuss the situation and determine appropriate action. Even then, he said, the director may still be given the document but with the understanding that the director would need to disclose the conflict to the rest of the directors and either recuse oneself from discussion of the issue or abstain from voting on a resolution regarding the issue. In response to a question, Ms. Parrino affirmed that each USAC employee annually completes a disclosure form, each of which is reviewed by Ms. Parrino for potential conflicts.

The Board DIRECTED the USAC General Counsel to provide additional guidance to directors who are members of or work for trade associations on potential conflicts of interest.

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

RESOLVED, That the USAC Board of Directors accepts the recommendation of the USAC Audit Committee to adopt a policy requiring members of the USAC Board of Directors to disclose, on an annual basis, corporate or other affiliations with entities that do business with USAC in order to identify actual and/or potential conflict of interest issues; and

RESOLVED FURTHER, That the USAC Board of Directors accepts the recommendation of the USAC Audit Committee to direct the Director Vice President of Internal Audit Division to distribute a list of audit reports that includes the identities of the entities referred to in such reports to the USAC Board of Directors prior to the distribution of any meeting materials for the meetings of the Committee or Board at which the audit reports will be reviewed.

a12.

Miscellaneous.

• Solicit Ideas for January 2004 Board 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 as of August 31, 2003, the balance of the Universal Service Fund (USF) was approximately $2.6 billion. He then explained how prior period adjustments affect the contribution base and factor, and that the size of the adjustments can greatly fluctuate from quarter to quarter making difficult to predict demand with any accuracy.

Mr. Carmichael reported that USAC received inquiries from several companies in response to USAC’s Request for Proposals for investment management services and that the USAC Investment Committee is expected to approve the selection of a firm at its November 2003 quarterly meeting.

Mr. Carmichael informed the Board that the FCC released an order earlier this month directing USAC to prepare financial statements for the Universal Service Fund consistent with generally accepted accounting principles for federal agencies (Federal GAAP) and to convert the accounting for the Funds to be in accordance with the United States Government Standard General Ledger (USGSGL) by October 1, 2004.

Finally, Mr. Carmichael explained how the uncollectability factor affects the contribution base and factor.

i2.

Report on Collection Efforts. Mr. Carmichael stated that during the last quarter, USAC’s Days Sales Outstanding (DSO) has improved dramatically primarily due to a stabilization of the outstanding accounts receivable and increased collections enforcement pursuant to the Debt Collection Improvement Act (DCIA). Mr. Carmichael said that as of this date, USAC has transferred approximately $40 million of delinquent debt representing 166 entities to the FCC under DCIA. He said that the threat of further transfers has led several delinquent carriers to now pay on time, clear up their delinquent balances, or seek payment plans. He said that USAC received more requests for payment plans than anticipated (approximately 30 versus the fewer than 10 anticipated). He further noted that although the professional fees and costs associated with the payment plan process have been lower than expected, the process is taking more staff resource time than anticipated due to the rigorous steps each carrier must be taken through before a payment plan is negotiated, if at all. Mr. Barash cautioned the Board that rejection of payment plans likely would generate more appeals by contributors, but that USAC staff is prepared to handle the workload associated with those potential appeals.

i3.

Status of Financial Operations Transition to USAC. For information only. No discussion held.

i4.

Report of Legislative and Media Activity. In response to a question about the bills pending before Congress that could affect universal service, Mr. Blackwell stated that based on his experience the chance of any of those bills passing is slim at this point because Congress is likely to adjourn soon. He noted that USAC staff continues to respond to questions and clarifications regarding documents presented to the U.S. House of Representatives Committee on Energy and Commerce, Subcommittee on Investigations and Oversight in response to their inquiry concerning the Schools and Libraries Support Mechanism.

i5.

Regulatory Report. For information only. No discussion held.

i6.

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

i7.

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

i8.

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

i9.

Report on USAC Financial Reporting Issues and the Nature of the Universal Service Fund. For information only. No discussion held.

i10.

Miscellaneous.

• Meeting between USAC Directors and FCC Senior Staff. Mr. Gumper informed the Board that he and Dr. Talbott would be meeting with senior members of the FCC staff later this same date to discuss three issues concerning USAC: (1) the Memorandum of Understanding with FCC Inspector General and the Department of the Interior Inspector General regarding audits of Schools and Libraries Support Mechanism beneficiaries; (2) description of the nature of the Universal Service Fund; and (3) a USAC personnel issue. Mr. Gumper stated that he would discuss the personnel issue with the Board in Executive Session per the Board’s policy to discuss such matters in Executive Session.

• Verbal Report on Board Member Request for the RHC/SL Contract Statement of Work. Ms. Parrino explained that at an August 29, 2003, meeting, the USAC Executive Committee directed USAC staff to schedule a meeting of the USAC Board of Directors to address the request presented by Mr. Rivera for access to certain confidential information regarding support mechanism operations. Ms. Parrino reported that after further discussions between herself, Mr. Gumper, Dr. Talbott, and Mr. Rivera following that meeting, and after Mr. Gumper consulted with the Board through an email message dated September 3, 2003, it was determined that sending a redacted version of the Statement of Work (SOW), in which the parts that include specific details about the triggers for application review that would provide either a service provider or a school/library applicant with information that could advantage them in the review process were redacted, should satisfy Mr. Rivera’s request. Mr. Rivera stated that the redacted version met his needs. Therefore, Ms. Parrino said that a meeting of the full Board to address this issue was no longer necessary. She said Mr. Rivera has since submitted some questions regarding the SOW and USAC staff are preparing a response and anticipate sending it to Mr. Rivera shortly.

• Verbal Report on the Status of Certain Schools and Libraries Support Mechanism Applications that are Under 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 this item be conducted in Executive Session because this item involves discussion of a program integrity 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 discussion 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.

i11.

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.

i13.

Review of 1st Quarter 2004 and Estimated 2004 Annual Programmatic Budgets. For information only. No discussion held.

i14.

Review of 1st Quarter 2004 High Cost, Low Income, Rural Health Care, and Schools and Libraries Support Mechanisms Projections for the October 31, 2003, Demand Estimate Filing with the FCC. For information only. No discussion held.

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

Bryant, Anne – by telephone

Jackson, Jimmy – Secretary

Buller, Karen – by telephone

Jortner, Wayne – Treasurer

Campbell, Anne

Lubin, Joel – Vice Chair

Cornell, Diane

Parrino, Cheryl

Davis, Fr. Bill

Rivera, Robert – by telephone

Eichler, Ed

Sanders, Dr. Jay – by telephone

Gumper, Frank – Chair

Sanford, Jo Anne

Hughes, Alison

Talbott, Dr. Brian

One member joined the meeting in progress:

Coltharp, James

Hess, Kevin

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

Scott, Wayne – VP, Internal Audit Division

Name

Company

Byrd, Vickie

FCC

Howard, Cathy

USAC

Miller, Linda

USAC

a5.

Authorization to Appeal Adverse Bankruptcy Litigation Decision – Confidential & Proprietary – Executive Session. Mr. Barash introduced this item and answered questions.

On a motion duly made and seconded, the Board adopted the following resolution per the following roll call vote as requested by the Chair. The vote count was as follows: YES = 14 (Ms. Bryant, Ms. Buller, Ms. Campbell, Ms. Cornell, Fr. Davis, Mr. Eichler, Mr. Gumper, Ms. Hughes, Mr. Jackson, Mr. Lubin, Ms. Parrino, Dr. Sanders, Ms. Sanford, and Dr. Talbott); NO = 3 (Mr. Coltharp, Mr. Jortner, and Mr. Rivera).

RESOLVED, That the USAC Board of Directors authorizes USAC the corporation to appeal the adverse decision of the Bankruptcy Appellate Panel of the United States Court of Appeals for the Ninth Circuit in Post-Confirmation Committee of Unsecured Creditors of Incomnet Communications Corporation v. USAC to the full United States Court of Appeals for the Ninth Circuit.

i10.

Miscellaneous.

• Memorandum of Understanding with FCC Inspector General and the Department of the Interior Inspector General Regarding Audits of Schools and Libraries Support Mechanism Beneficiaries. Due to the concern several directors had regarding these audits of Native American schools, the Board DIRECTED USAC staff to create a grid showing the ratio of Native American schools being audited versus non-Native American schools.

• Verbal Report on the Status of Certain Schools and Libraries Support Mechanism Applications that are Under Review. Dr. Talbott and Ms. Parrino reported on and led a discussion on the status of certain Schools and Libraries Support Mechanism applications that are under review. No action was taken.

• USAC Personnel Issue. Mr. Gumper informed the Board that Cheryl Parrino has informed him that she will resign as USAC Chief Executive Officer effective Jan. 31, 2004. He told the Board that he regretfully accepted that resignation. USAC has retained an executive search firm and anticipates naming a successor prior to Ms. Parrino's departure.