The Internet School Scam

The Internet School Scam

A questionable plan to wire poor schools has turned into a business boondoggle.


When large amounts of cash and the entrepreneurial spirit intersect with an institution as impoverished and trusting as schools, it’s not long before financial scandal strikes. That time is now here, and the nation’s public schools are getting a spectacular Enron-style education, soon to be elevated to the investigative chambers of Congress. This scandal also illustrates, rather painfully, the confusion among education’s policy-makers about what really should be emphasized in the nation’s classrooms.

The story begins with the schools’ rapid investment over the past decade in computer technology and Internet systems. The dollars for many of those purchases have come from a little-known federal program called the “e-rate” (for education rate). Launched as part of the 1996 Telecommunications Act, the program is overseen by the Federal Communications Commission and its designees, a series of loosely run, quasi-public management firms. Each year, the e-rate provides poor schools with roughly $2.25 billion in subsidies for new Internet networks. The subsidies come from a tax on everyone’s phone bill–a line innocuously labeled “universal service fee”–which started at 3 percent but now hovers around 9 percent.

The revenues from this tax cover up to 90 percent of a poor school’s costs for Internet systems. This has allowed school districts to contract with some of the nation’s top-of-the-line technology firms–outfits like NEC, Verizon and IBM. Construction contracting has always been fertile ground for inflated costs and corrupt payment schemes, but the Internet wiring jobs–with their wide popularity, unprecedented expense and technical complexity–have taken these opportunities to spectacular new levels.

Consider a few details from one such deal, in San Francisco. In October 2000 the FCC’s management firm approved a $50 million grant to finance a massive school networking project in the city. (The school district was on tap for another $18 million, making the total cost come to $68 million.) Months later, to everyone’s surprise, the district turned the $50 million grant down. After examining the contract, district technicians had discovered they could build the system themselves for less than their meager share of the costs–that is, for less than $18 million.

The reasons become apparent in the fine print of the voluminous bid from NEC, the firm that won the San Francisco contract. Onpage after page, NEC generously marked up prices on computer hardware, sometimes by as much as 400 percent. On one small Internet switch, for example, NEC’s bid would have given the firm a profit margin of $780,000. This is the educational equivalent of the $640 toilet seats famously sold to the Pentagon by military contractors during the Reagan Administration.

The basic problem here is well-known to federal authorities. Various Republican Congress members, wary of anything that smells like a new tax, have long been questioning the necessity of the e-rate program. In 1998 Senator John McCain was concerned enough about oversight weaknesses in the program that he asked the General Accounting Office to investigate. The GAO found that the FCC’s first e-rate management firm was sending out letters of funding commitment before evaluating the projects it was financing, and that it had yet to set up an auditing system. The GAO also noted that the e-rate created a duplicate program for funding technology in schools, because $12 billion was already available through the Education Department.

Although the FCC’s e-rate management firms promised to make corrections, little was done. An audit by the FCC’s Inspector General last year found questionable financial dealings of one sort or another “at nearly all locations” where e-rate contracts were examined. By late 2002 federal authorities had begun to take some action. In one case prosecutors charged a New York company, Connect2 Internet Networks–which had done more than $9 million of business with thirty-six schools–with eight counts of federal crimes. The allegations: The firm bought more expensive gear than its customer schools could afford, created fake invoices to suggest the schools had paid their share, then coached school officials to lie about the arrangements. (Connect2’s owner, John Angelides, eventually pleaded guilty to one count of conspiracy.)

As the Connect2 case was developing, federal auditors killed an $18 million e-rate job with IBM in Ysleta, Texas. They concluded that IBM had set up the job in such a way that it precluded bids from competing Internet contractors. IBM denied the charges, but government regulators said, “The record reflects that the overriding goal of the IBM-Ysleta relationship” was to maximize the federal subsidy, “not necessarily to promote educational goals.” IBM, which offered the same “sole source” option to many districts around the country, was not a small player in this game. Up until the Ysleta contract, it had received $351 million of e-rate money. For 2003, IBM sought nearly $1 billion in e-rate projects–nearly half the program’s annual budget. Most of that money is now being held up while the problems with IBM’s bids are investigated.

By spring 2003, Congressional investigators had gotten wind of these troubles and were embarked on their own inquiries. These are now wrapping up and are expected to be the subject of hearings before the House Energy and Commerce Committee in February or March. From all indications, investigators have found some smoking guns. “We have uncovered numerous instances of fraud and abuse totaling tens of millions of dollars,” says Ken Johnson, the committee’s press secretary. “We’re convinced that the problem is far worse than we feared.” There is no formal count yet on how many companies or schools are involved in these abuses, but insider estimates indicate that dozens of different companies across the country may be implicated. (At this point, only two cases have made it through the courts.)

In the wake of these troubles, the FCC and its e-rate management firms are starting to take more care in approving new grants. But the size of the e-rate grants, and many others that support high-end wired systems in the schools, have not appreciably diminished.

There are three bitter paradoxes in this. First, it won’t be long before the Internet goes wireless, which will make much of the schools’ investment in wired computing–at a cost of roughly $80 billion over the past decade–obsolete. Second, yesteryear’s frenzy to wire the schools occurred during very flush times. Today, states are struggling with budget cuts–and the damage these cuts are doing to fundamental school needs such as building repairs, teacher salaries and purchases of books, science supplies and other classroom necessities.

Third, and perhaps most important, most computer technology has been sold to schools–especially poor schools–on little more than hype. One of the most commonly heard selling points in this campaign is to prepare youngsters for tomorrow’s increasingly high-tech jobs. But when business leaders talk about what they need from new recruits, they hardly mention computer skills, which they find they can teach employees relatively easily on their own. Most employers say their priority is what are sometimes called “soft” skills: a deep knowledge base; the ability to listen and communicate; to think critically and imaginatively; to read, write and figure; and many other capabilities that schools are increasingly neglecting. A report from the Information Technology Association of America, which represents a range of companies that use technology, put it this way: “Want to get a job using information technology to solve problems? Know something about the problems that need to be solved.”

All of which casts entirely new light on the “digital divide”–the common belief that the poor are being shut out of social and economic opportunities because they have fewer computers than wealthy families do. Widely promoted by the Clinton Administration, this campaign has become so appealing that, according to a recent report from the Education Department, computers are almost as abundant in poor schools now as they are in wealthy ones. Nonetheless, political and education leaders continually cry about this supposedly terrible divide. In reality, the schools’ new technology riches have taken the real divide between rich and poor children–the educational divide–and widened it.

In Harlem, for example, teachers in overcrowded classrooms now have to spend much of their time managing technical hassles the schools can’t afford to fix, and watching for cheating, instant-messaging tricks and illicit material on screens that teachers cannot control or even see. When the computers do work, fancy software programs automate design and math functions so beautifully that students don’t have to think through much of their work anymore. School papers throughout the country are so dominated by computer graphics these days that students often spend only a fraction of their time on the intellectual content of the assignment. Strangely, instead of bemoaning scenes like these, nearly everyone–teachers and parents, principals and politicians–applaud them.

Meanwhile, schools that are doing truly good work often downplay technology, concentrating instead on human basics. These not only involve creative, often theatrical, approaches to the three Rs; they also include a broader definition of achievement than the thin, standardized tests being pushed by the Bush Administration. Interestingly, most of these schools have also invested in their teachers more than they have in machinery. Before the rest of the nation’s schools and their federal benefactors buy more fancy digital novelties, they should get their houses in order on academic basics of this sort. Everyone knows you need to learn to walk before you run.

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