FCC Seeks to Expand ‘Obamaphone’ Boondoggle to the Internet

Access to reliable, high-speed Internet is almost given in today’s America. But should it be subsidized? The Federal Communications Commission thinks it should, now more than ever. On May 28, FCC Chairman Tom Wheeler announced a proposal to expand the agency’s Lifeline program to include broadband Internet. Costing about $2 billion annually in recent years, Lifeline defrays the cost of landline or mobile phone service for low-income subscribers. Carriers and consumers share in the cost; Internet service providers soon may join them. Funding has risen so much under Obama that the program often is called ‘Obamaphone.’ Given the rampant fraud, the main issue would seem less the proper funding level than the program’s very existence.

Obamaphone, or whatever one wishes to call it, long predated the Obama presidency. The FCC created Lifeline in 1984 during the Reagan years as a means of enabling telecom companies to offer monthly service discounts to low-income households, especially the elderly who may have emergency medical problems. States would supply matching funds. The following year, 1985, the commission redesigned the program to further reduce phone bills. In 1987, the FCC created another program, Link Up America, that would pay for a household’s phone connection and installation fees, often in conjunction with Lifeline. Over time, the program would grow, providing a lesson, if unintended, on how economics and interest group politics overlap.

Let’s look first at the basics. Under Lifeline, a phone company offers heavily discounted service to customers, often accompanied by a free phone. Government then reimburses the company. Eligible households must have incomes no higher than 135 percent of the federal poverty line and/or receive benefits from one or more means-tested anti-poverty programs, including Medicaid, food stamps and Section 8 rental housing vouchers. The per-household subsidy is now $9.25 per month, though additional aid is available for residents of Indian and Alaskan tribal communities. Only one person per household may participate, and that person must choose between a landline and a cell phone subsidy. And unsubsidized residential subscribers as well as service providers contribute to the subsidy pool; residents pay a monthly surcharge on average of about $2.50. Most crucially, telecom companies, not the government, determine beneficiary eligibility. Participant phone carriers effectively are expected to police themselves in a context in which the lack of self-policing brings in the bucks.

The Lifeline program, in other words, has a natural base of support among subsidized phone companies and subsidized customers. And the base has grown over time. The pivotal moment was the Telecommunications Act of 1996. Part of that Clinton-era law placed the FCC’s Low-Income Program (of which Lifeline by far is the largest) and three other programs – the Connect America Fund, Rural Health Care, and the Schools & Libraries Program (E-Rate) – under a new subsidy mechanism known as the Universal Service Fund (USF). The legislation also chartered a new entity, Universal Service Administrative Company (USAC), to run these programs. The following year, in 1997, the FCC issued a Universal Service Order with the intent of increasing federal support for Lifeline across the U.S. and territories, and across a broad array of services (e.g., single-party service, directory assistance). In 2005, during the George W. Bush presidency, the base of support grew further when the FCC extended eligibility to prepaid wireless phone plans. The Obama administration, rarely one to waste an opportunity to expand the federal government, has promoted Lifeline aggressively. And costs have risen accordingly. During fiscal years 2005-08, the average annual federal tab was a little over $800 million. In fiscal year 2012, the contribution had rocketed to more than $2.2 billion, a sum representing assistance to 17 million households, before falling to about $1.8 billion in fiscal 2013 and $1.7 billion in fiscal 2014 following the imposition of overdue oversight.

The FCC believes Lifeline could use another boost. On Thursday, May 28, Chairman Tom Wheeler unveiled the rudiments of a plan that would make high-speed broadband Internet service eligible for Lifeline aid. “A world of broadband ‘haves’ and ‘have-nots’ is a world where none of us will have the opportunity to enjoy the full fruits of what broadband has to offer,” Wheeler noted in a blog post. “As communications technologies and markets evolve, the Lifeline program also has to evolve to remain relevant. Broadband is key to Lifeline’s future.” The proposal would apply to the purchase of stand-alone Internet access for laptops, home computers and cell phones. The proposal thus far has avoided the sticky issue of whether Internet Service Providers would have to contribute funds and in what proportion. The FCC reportedly may decide on a course of action as early as this Thursday, June 18.

The proposal to launch Lifeline into cyberspace rests on the highly questionable premise that our nation suffers from a gaping “digital divide.” Wheeler and other program enthusiasts frequently cite data purporting to show that Internet service is the province of the well-off. Pew Research Center survey data released in November 2010 concluded that 95 percent of U.S. households with an annual income of at least $75,000 owned a cell phone, as opposed to 75 percent of households with an income of less than $30,000. The Pew report also found that 87 percent of $75,000-and-over households had broadband home Internet service, a figure that was only 40 percent for households making less than $30,000. Because blacks and Hispanics are overrepresented in lower income brackets, they tend to have less service. In May 2013, the U.S. Census Bureau released a report, “Computer and Internet Use in the United States.” Based on data collected in a July 2011 supplement to the Current Population Survey, the study concluded that 75.6 percent of all U.S. households had a computer at home, up from 8.2 percent in 1984 and 61.8 percent in 2003. Internet access was 71.7 percent in 2011, up from 18.0 percent in 1997 and 54.7 percent in 2003. Whereas 76.2 percent of non-Hispanic whites and 82.7 percent of Asians in 2011 had Internet service at home, blacks and Hispanics registered figures of 56.9 percent and 58.3 percent, respectively. The figures for all groups, however, were well higher than in 2000.

“Civil rights” activists see lower rates for blacks and Hispanics as clear evidence of discrimination. Malkia Cyril, executive director of the Oakland, Calif.-based Center for Media Justice, put it this way several years ago in The Huffington Post: “We know that digital inclusion and closing the digital divide is only possible with affordable, accessible, and open high-speed networks. True representation of people of color and the poor demands that the civil rights community fight for this as vigorously as we fight for equal access in our schools, services, and in the broader society.” More recently, this past Wednesday, June 10, Wade Henderson, president of the Washington, D.C.-based Leadership Conference on Civil and Human Rights, in a letter to Chairman Wheeler, urged the immediate expansion of Lifeline to include Internet service. He cited, with great alarm, Pew and other survey data showing that while 92 percent of households with incomes in the $100,000-to-$150,000 range have broadband service, these figures were: 47 percent for households with incomes below $25,000; 64 percent for African-Americans; 53 percent for Hispanics; 63 percent for people with disabilities; 51 percent for people with limited English proficiency; and 38 percent for households who prefer to communicate in Spanish (i.e., prefer not to learn English). Such disparities, he insisted, deprived “historically disadvantaged communities of the very opportunities they need to participate fully in America’s success.”

This view, all too often pitched in this moralizing tone, is highly misleading for two reasons.

First, computer prices have dropped dramatically over the years, even as computer speed and features have expanded dramatically. During the early and mid-Nineties, a microcomputer running at 5 Mhz typically cost around $3,000. Today a microcomputer running at 2 Ghz (400 times as fast) can be had for $1,000 or less. Name-brand laptops powered by Windows 8 now cost as little as $250 and possibly less during a Black Friday or year-end holiday sale. And for all intents and purposes, every computer sold today is equipped with Internet access, and a Web browser and search engine. Computer service is an investment, and more to the point, it is an affordable one. The notion that large swaths of the American population have been “excluded” from computer access is little short of ridiculous.

Second, the notion that one has a right to a subsidy for phone or Internet service if he or she cannot afford it is philosophically on shaky ground. Rational persons, regardless of race or income, adhere to something resembling a budget – i.e., income-based spending limits – on which to base future consumption decisions. Such people are aware of constraints, adapt to them, and try to improve their economic situation. One no more has a “right” to a high-speed computer than a “right” to a flat-panel TV, a new car or an Ivy League education. In his classic book, “The Vision of the Anointed,” economist and Hoover Institution Senior Fellow Thomas Sowell rebutted the deception inherent in treating a lack of affordability as an injustice:

People are often said to lack “access” to various jobs, educational institutions, or credit, when in fact they may not have behaved or performed in a way that would enable them to meet the same standards that others meet. “Access” is just one of a number of ex ante expressions – “opportunity,” “bias,” and “glass ceiling,” for example – used to describe ex post results in such a way as to preempt the whole question as to why those results turned out the way they did…

People who do not choose to spend their money on health insurance, but on other things, are denied “access” to health care by “society.” On the contrary, they are often given medical treatment at other people’s expense, whether under specific social programs or in various other ways, such as using hospital emergency rooms for things that are not emergencies at all, or which have become emergencies only because nothing was done until a medical problem grew too large to ignore.

Yes, many people do not have a computer with Internet access. Nor do they own a cell phone. But it is hardly a stretch to assert that some of these people simply don’t feel any great need to have them. Others, whether out of illiteracy or inertia, lack the ability to navigate such devices. At any rate, the ownership trend has been upward. That about three-fourths of all households with a combined annual income of less than $30,000 have a mobile phone, as Pew researchers found several years ago, is a landmark achievement. Three decades ago, when Lifeline was launched, relatively few people in any income bracket owned a cell phone. And what passed for cell phones back then would be laughed at today.

But what really makes Lifeline unjustifiable are the unconscionable levels of documented fraud. As emphasized earlier, phone carriers get to determine household eligibility. Aspiring participants apply via “self-certification” after which they are judged eligible or not. Phone companies are not objective observers. Ever looking to expand their customer base, they have a strong incentive to take applicants, however suspicious, at their word. Making it even easier for subscribers is that, once enrolled, they don’t have to recertify themselves. And as participation in a means-tested anti-poverty program is sufficient evidence of need, the pool of participants grows right alongside the welfare state. Phones as well as phone service are subsidized.  And mass media in markets across the country frequently air commercials selling Lifeline subscriptions (see photo). All of this adds up to an invitation to scams.

It would be hard to overestimate the extent of Lifeline fraud, especially under President Obama. A Wall Street Journal analysis published in February 2013 showed that 41 percent of over six million active subscribers “either couldn’t demonstrate their eligibility or didn’t respond to requests for certification.” If anything, this was an undercount because two of the largest subsidized phone companies, TracFone Wireless and Nexus Communications, managed to convince the FCC to keep their results confidential. Even if the numbers for TracFone and Nexus reflected those of participating telecom companies as a whole, the level of fraud would be well into the hundreds of millions, and possibly close to $1 billion, each year. And in October 2010, the U.S. Government Accountability Office (GAO) issued a report, “Improved Management Can Enhance FCC Decision Making for the Universal Service Fund Low-Income Program,” concluding that the program lacked sufficient internal controls.

In any number of states, fraud virtually defines Lifeline. Examples:

Georgia. As of late-2014, an estimated 721,000 persons in the state were Lifeline subscribers, more than the entire number of eligible households. Georgia Public Service Commissioner Doug Everett, in proposing a $5 consumer service fee, explained the situation this way: “We found multiple phones in the same household because no one is verifying or checking information. There’s always going to be collateral damage when you’re having a war, and we’re having a war with fraud and abuse.”

Maryland. By the third quarter of 2012, the number of Lifeline subscribers in Maryland had risen during the previous three years by roughly 100-fold to 645,000, nearly double the number of eligible low-income households in the state. By any measure, this is a staggering increase.

Colorado. Lifeline provided 117,000 free cell phone plans in Colorado in the first half of 2014 alone. It’s a fair bet many of those subscribers were hustlers. Last fall, an investigative news team from Denver CBS-TV affiliate KCNC made multiple trips to the downtown intersection of Colfax Avenue and Broadway, where a number of mobile phone distributors had set up tents to hand out free phones. Reporters found evidence of sales agents knowingly looking past food stamp fraud in order to line up new customers.

Ohio. As of 2008, prior to President Obama taking office, there were around 280,000 state residents enrolled in Lifeline. By 2011, that figure exploded to nearly 600,000. As many as 5 percent of all recipients had signed up for more than one phone line, a clear violation of the rules. Anyone doubting a prevailing sense of racial entitlement (among blacks) should check out this brief but candid video shot at a Cleveland-area rally for Obama during the 2012 presidential campaign, which went viral.

It’s not as if the Federal Communications Commission hasn’t noticed these things – or taken action. In 2011, the FCC conducted a review of more than 3.6 million subscriber records. The effort reportedly eliminated nearly 270,000 duplicate subscriptions in 12 states, saving taxpayers an estimated $33 million. On January 31, 2012, the FCC adopted new rules to discourage waste and abuse. Prominent steps included: the creation of a National Lifeline Accountability Database to prevent multiple carriers from receiving support for the same subscriber; the creation of databases from government sources, so as to enable automated verification of initial and ongoing eligibility; the end of the Toll Limitation and Link Up America subsidies, which have served as incentives to sign up low-income customers regardless of eligibility; the establishment of a uniform and interim flat rate of reimbursement, allowing carriers to obtain a subscriber’s signature electronically; and the development of metrics for measuring program performance.

The FCC followed up this effort the following year. On November 1, 2013, the commission’s Enforcement Bureau estimated that more than two million recipients of Lifeline aid improperly had received duplicate subscriptions, up from its 1.1 million estimate of a month earlier; the FCC eliminated these subscriptions. The next month, the commission began a database of Lifeline subscribers in Arkansas, Louisiana, Maryland, Oklahoma and Washington State in order to flag existing duplicate accounts and prevent new ones from being created. The commission expanded the program to the rest of the nation in April 2014.

Accordingly, the government has stepped up its crackdowns on unscrupulous phone carriers. A prominent example: On April 10, 2014, the U.S. Justice Department charged three men – Thomas Biddix, Kevin Brian Cox and Leonard Solt – with conspiracy to commit more than 15 counts of wire fraud, false claims and money laundering in connection with fleecing the Lifeline program out of $32 million. The indictment was the result of a joint probe by the FBI, the IRS and the FCC inspector general. During September 2009-March 2011, said the feds, the defendants diverted the funds to a Melbourne, Fla.-based company known as Associated Telecommunications Management Services. The accused persons also allegedly used a large portion of the money to “finance their personal business ventures and lavish lifestyles, including personal living expenses, luxury automobiles, yachts and private jet airplanes.” The case is still active.

Additionally, the FCC’s Enforcement Bureau have uncovered a number of cases in which phone companies apparently violated the FCC rule limiting Lifeline subscriptions to one subscriber per household and/or received payments for thousands of customers already obtaining Lifeline service from the same company. In November 2013, the FCC issued Notices of Apparent Liability (NALs) against the following companies: Conexions Wireless ($18.4 million for violations over the course of eight months in Arkansas, Maryland and West Virginia); i-wireless ($8.8 million for violations over seven months in Ohio, Illinois, North Carolina, Tennessee, West Virginia, New York, Indiana and South Carolina); and True Wireless ($5.5 million for violations over eight months in Arkansas, Maryland, Oklahoma and Texas). The next month, the FCC issued NALs against three companies for requesting/receiving Lifeline support payments for individual customers who appeared more than once on the subscriber lists of the following companies: Cintex Wireless ($9,461,978); Telrite Corporation ($22,399,761); and Global Connection ($11,702,695).

The bad reputation of Lifeline hasn’t passed unnoticed on Capitol Hill. Sen. David Vitter, R-La., thinks waste and fraud are of such a magnitude as to justify canceling plans to extend the program to cyberspace. “The FCC has failed to manage Lifeline efficiently in its current form,” he said after Chairman Wheeler’s announcement last Wednesday. “I cannot support any expansion of a program that has so few safeguards in place.” Earlier, back in March 2013, Vitter had proposed an amendment to a Senate budget resolution that would have eliminated mobile phone service from the Lifeline program. The measure was defeated in a virtually party-line-vote; Sen. Claire McCaskill, D-Mo., crossed the aisle to vote with the Republicans. McCaskill and Sen. Tom Coburn, R-Okla., each also sponsored separate amendments that, respectively, would have eliminated the program outright and imposed a $5 minimum fee for subsidy recipients. Neither initiative came up for a vote.

Meanwhile, on the House side, Energy and Commerce Committee Chairman Fred Upton, R-Mich., and Communications and Technology Subcommittee Chairman Greg Walden, R-Ore., that same month sent a letter to then-FCC Chairman Julius Genachowski expressing their view that the internal reforms have been insufficient to stem the waste and abuse. They wrote:

While reforms the FCC adopted starting in 2011 may be slowing growth, they do not appear to be containing the absolute size of the fund. We remain concerned that the trajectory is still unsustainable. Since the American people ultimately pay for the program through a surcharge on their phone bills, and because many of those footing the bill face their own challenges in the economy, we want to make sure ratepayer funds are being spent wisely. And since waste and abuse will divert funds from helping those who truly need it, we want to make sure the funds are being appropriately targeted.

The letter was drafted in preparation for a House hearing on April 25, 2013. The hearing was held, but did not result in action.

FCC members who support the program believe the recent anti-fraud rules will eliminate future scams. Back in March 2013, Commissioner (and soon to be Acting Chairwoman) Mignon Clyburn, daughter of Congressman James Clyburn, D-S.C., responding to the proposed Senate legislation, stated: “(The FCC) inherited a program that did not gave proper controls in place, but last year we took appropriate and significant steps to correct that. As a result, we saved more than $200 million last year and are on target to save $2 billion by the end of 2014.” Tellingly, she ended her statement by saying, “In no uncertain terms should qualifying low-income consumers who have followed the rules be refused service.” This is the language of a true believer. A skeptic would have stated: “In no uncertain terms should unqualified consumers of any income level be granted service.”

Can the FCC’s Lifeline reforms work? Experience suggests that fraud is so pervasive that the reforms will produce only modest results. And given the previously cited Colorado data for the first half of 2014, phone service providers and consumers haven’t necessarily gotten the message. Conceivably, though not likely, the bad publicity over the scams may delay or even prevent the launch of Lifeline into cyberspace. The five-member commission isn’t going to hold a vote on the proposal until it resolves the issue of who pays. Internet service providers obviously aren’t eager to carry the full load, but they do strongly support an expansion, and are willing to negotiate with the FCC. Scott Bergmann, vice president of regulatory affairs for CTIA – The Wireless Association, an industry trade group, parsed his words this way: “We look forward to working with the FCC as it evolves this critical program in a manner that is fiscally responsible to Americans’ reliance on mobile solutions.”

The FCC is officially nonpartisan, but as in any Washington bureaucracy, its members owe their jobs on some level to political loyalties. Pursuant to longstanding custom, in a manner similar to that of the National Labor Relations Board, three of the FCC’s five members belong to the party in power; the two others belong to the party in opposition. As long as Barack Obama is in the White House, then, this translates into three Democrats and two Republicans serving staggered five-year terms. Chairman Tom Wheeler, now 69, is a Democrat who didn’t exactly win his job by being a neutral observer. A successful venture capitalist, he has been a prominent lobbyist, at various points heading the National Cable & Telecommunications Association and CTIA. Significantly, he worked extensively on President Obama’s 2012 re-election campaign during the Iowa caucuses and subsequently bundled more than $500,000 in donations. He’s been serving as FCC chairman since November 2013. Wheeler’s first-term predecessor, Julius Genachowski, for his part, was a Harvard Law School friend of President Obama. He since has joined The Carlyle Group, a Washington, D.C.-based global private equity management firm.

Despite the deserved bad publicity, political support for continuing Lifeline remains strong. While the two Republicans on the Federal Communications Commission, Ajit Pai and Michael O’Rielly, along with many lawmakers on Capitol Hill, may be skeptical about using funds for an expansion into the Internet, very few are willing to advocate cancelling the program outright. But why shouldn’t the latter option be considered? Outside of help for the elderly and disabled, and specifically for the purpose of contacting emergency medical personnel, the program is unjustifiable. Phone service, like computer service, is affordable to virtually any responsible able-bodied adult in this country. Cutting off Lifeline subsidies would deny “access” only to ripoff artists. Taxpaying phone account holders deserve better.


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