Cmsd e rate investigative report

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INVESTIGATIVE REPORT:

[Insert month] 20[ ]

AN ASSESSMENT OF CERTAIN ISSUES CONCERNING THE CLEVELAND METROPOLITAN SCHOOL DISTRICT’S PARTICIPATION IN THE FEDERAL E-RATE PROGRAM

Date: January 26, 2016 January 26, 2016

Contents 1.

INTRODUCTION .......................................................................................................... 1 2.

3.

METHODOLOGY ......................................................................................................... 2 A.

Document Review ................................................................................................... 3

B.

Interviews ................................................................................................................ 4

BACKGROUND ON E-RATE PROGRAM .......................................................... 6 A.

The E-Rate Program: Historical Overview ............................................................. 6

B.

E-Rate Program Features Of Particular Relevance To Our Analysis ..................... 7 1. Application Process Schedule ...................................................................................... 7 2. Description Of Products And Services For Which Support Is Sought ....................... 7 3. Support Can Be Provided Only For Products And Services Which Are Eligible Under The Rules .................................................................................................. 8 4. An Applicant Must Be Able To Support The Calculation Of Its Claimed Discount Rate ...................................................................................................... 8 5. There Are Deadlines ............................................................................................ 8 6. There Are Invoicing Options ................................................................................ 9 7. Obtaining Support For What Was Approved .......................................................... 9 8. here Are Document Retention Requirements.......................................................... 9

C.

CMSD Participation In The E-Rate Program ........................................................ 10 1. Support Committed And Expended ..................................................................... 10 2. Internal Management And Responsibility ............................................................ 10 3. Internal Guidelines ............................................................................................. 11 4. CMSD E-Rate Program Audits ........................................................................... 11 5. Subsequent CMSD Compliance History .............................................................. 12

4.

EXECUTIVE SUMMARY ....................................................................................... 13

5.

FINDINGS AND ANALYSIS .................................................................................. 21 A.

Segment 2 .............................................................................................................. 21 1. Introduction ....................................................................................................... 21 2. Pre-Contract ...................................................................................................... 22 3. Post-Contract, Pre-USAC Commitment ............................................................... 23 4. Post-Funding Commitment Decision, Including Invoicing And Reimbursement ..... 25 5. Segment 2 Summary Assessment ........................................................................ 27

B.

Segment 3A ........................................................................................................... 28 1. Introduction ....................................................................................................... 28 2. Pre-Contract ...................................................................................................... 29

3. Post-Contract, Pre-USAC Commitment ............................................................... 30 4. Post-Funding Commitment Decision, Including Invoicing And Reimbursement ..... 31

C.

Segment 3B/4A ..................................................................................................... 33 1. Introduction ....................................................................................................... 33 2. Pre-Contract ...................................................................................................... 34 3. Post-Contract, Pre-USAC Commitment ............................................................... 35 4. Post-Funding Commitment Decision, Including Invoicing And Reimbursement ..... 36 5. Segment 3B/4A Summary Assessment ................................................................ 38

D.

Segment 4B ........................................................................................................... 39 1. Introduction ....................................................................................................... 39 2. Pre-Contract ...................................................................................................... 40 3. Post-Contract, Pre-USAC Commitment ............................................................... 41 4. Post-Funding Commitment Decision, Including Invoicing And Reimbursement ..... 41 5. Segment 4B Summary Assessment...................................................................... 45

6.

BRIEF REVIEW OF A FEW FRNS NOT AT ISSUE IN THE BAC REPORT ......................................................................................................................... 46 A.

FRNs Examined .................................................................................................... 46

B.

Findings ................................................................................................................. 47

7.

CONCLUSION ............................................................................................................. 49

8.

RECOMMENDATIONS............................................................................................ 52 A.

Future New School Construction Projects: Lessons To Be Learned ................... 52

B.

Formulate And Implement Sound Internal E-Rate Program Procedures .............. 53

C.

Attend USAC E-Rate Training And Otherwise Devote Necessary Time And Resources To Understand The E-Rate Program.................................................... 54

9.

ACKNOWLEDGEMENTS ....................................................................................... 55

10.

AUTHOR BIOGRAPHIES ....................................................................................... 55

Clark Kent Ervin Partner

Paul C. Besozzi Partner

2550 M Street NW Washington DC 20037

2550 M Street NW Washington DC 20037

T: +1 202 457 5234 E: Clark.ervin@squirepb.com

T: +1 202 457 5292 E: Paul.besozzi@squirepb.com

Squire Patton Boggs is the trade name of Squire Patton Boggs (US) LLP, a limited liability partnership organized under the laws of the state of Ohio, USA. Squire Patton Boggs (US) LLP is part of the international legal practice Squire Patton Boggs which operates worldwide through a number of separate legal entities. Please visit squirepattonboggs.com for more information.

1.

INTRODUCTION

The Bond Accountability Commission 2 Inc. (“BAC”) is an independent, non-profit, allvolunteer organization in Cleveland, Ohio appointed by the Chair of the Board of Education in consultation with the Mayor. To help assure the city’s taxpayers that $535 million raised through construction and improvement bonds1 is being spent responsibly, the BAC monitors the expenditure of those funds for new construction and renovation of K-12 schools in the Cleveland Metropolitan School District (“CMSD” or “District”). These construction projects were part of the State-authorized Accelerated urban school building assistance program under the auspices of the Ohio School Facilities Commission (“OSFC”), which is now part of the Ohio Facilities Construction Commission (“OFCC”).2 On March 21, 2015, the BAC issued a report titled, “E-rate: Missed opportunity - Millions of dollars in federal technology reimbursements” (“BAC Report”). (Attachment 1) As the title implies, the purpose of the BAC Report was to attempt to explain why the CMSD failed to receive the full reimbursement for which it had been approved for the money it spent for certain technology equipment and services in certain newly-built schools. The source of the reimbursement funds is the Schools and Libraries Universal Service Support Mechanism, which is commonly known as the “E-Rate Program,” and referred to hereafter as such or as “Program.”

The Universal Service Administrative Company (“USAC”), a non-profit entity established by the Federal Communications Commission (“FCC”), administers the Program, which provides financial support, through discounts or rebates, to eligible K-12 schools to help them pay for certain telecommunications and Internet access services, as well as in-school technology related to delivery of such services.3 The BAC Report focused specifically on E-Rate Program support for the technology equipment and infrastructure costs associated with the construction of schools in Segments 2-4 of the school construction program funded by Issue 14 bonds. According to the BAC Report, USAC committed to provide $12.28 million in E-Rate funding for these schools, yet the CMSD actually received only a fraction of that amount, namely, $3.71 million.

After a nearly two-year inquiry, the BAC summarized its work as follows, “When the Bond Accountability Commission initiated its inquiry in June 2013, its goal was to establish what happened and why, encourage whatever steps might be possible to recover missed

1

The bonds were authorized by Cleveland voters as “Issue 14” in May 2001, and renewed in November 2014 as “Issue 4.” See http://www.bondaccountability.org/mission/

2

The OFCC merged the operations of the State Architect's Office and the OSFC on September 10, 2012, combining the State's construction authority and resources into a single entity. The OSFC continues to exist within the new consolidated agency and focuses on programmatic and planning issues related to K-12 construction. Hereinafter, we will refer only to the OSFC.

3

The Program rules classified eligible telecommunications and Internet access services as “Priority 1” services because support for these services was funded first. The eligible in-school technology hardware and related (e.g., maintenance) services were classified as “Priority 2” services because they were funded only after eligible dollar demand for Priority 1 was satisfied. As discussed in more detail below, in 2014 the FCC refocused the Program on support for broadband connectivity to and within eligible schools, and began the process of phasing out support for legacy voice services.

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reimbursements, and determine what might be done so that any mistakes, oversights, or other problems would not happen again. The BAC hoped to present to the Board of Education and the public a definitive account of why the District had not received reimbursements for which the ERate program had committed funding. However, after several rounds of questioning CMSD officials, the BAC cannot provide such a report. The BAC still has requests for information and documentation outstanding, and it will provide updates when possible, but at this point it seems prudent to present this matter to the Board of Education, which has both the authority to compel a more complete explanation and the responsibility to do so.”4 In response to the BAC Report, Eric Gordon, the Chief Executive Officer (“CEO”) of the CMSD, hired the law firm of Squire Patton Boggs to conduct a thorough, independent investigation to answer the questions the BAC said that it was unable to answer in its report.

Additionally, to the extent that it was possible to do so within a reasonable time frame, we were to undertake a comprehensive review and evaluation of the CMSD’s processes, procedures, and practices relating to its participation in the E-Rate Program for the period, January 1, 2006 (which is roughly when the Segment 2 school construction program began) to date. Finally, as the BAC attempted to do, we were asked to make recommendations so that the identified mistakes, oversights, and other problems never happen again.

Throughout the course of our engagement, the District was wholly cooperative in timely and fully responding to our extensive requests for documentation. District personnel, from the CEO on down, readily spoke with us and shared their knowledge and experiences. The findings and conclusions we make herein are our own and were, as intended by the CEO, independently developed.

In the report that follows, we first explain the methodology we used to conduct our investigation, followed by background on the E-Rate Program and the CMSD’s participation therein. Thereafter, an Executive Summary of the key contributing factors precedes detailed analyses of each of the four construction Segments at issue.5 After a brief analysis of a sample of CMSD E-Rate applications not examined in the BAC Report, we provide conclusions and recommendations.

2.

METHODOLOGY

This report is based primarily on: (a) a review and assessment of numerous documents, including emails, related to the Segments; and (b) the conduct of a series of face-to-face and telephone interviews with key present and former CMSD personnel and others outside the CMSD.

4

BAC Report, pp. 1-2.

5

The four Segment packages were: Segment 2, Segment 3A, Segment 3B/4A, and Segment 4B, which corresponded with E-Rate Program Funding Years 2006, 2007, 2008 and 2010, respectively. They are collectively referred to herein as the “Segments.”

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A.

Document Review

We reviewed and analyzed documents related to the specific E-Rate applications that were the subject of the BAC Report and the CMSD’s E-Rate process in general, including periods leading up to the time frames examined by the BAC Report. These documents originated from, among other sources: (a) the CMSD E-Rate Program files located at the District’s East Professional Center (“E-Rate File Room”); (b) other publicly-available databases (e.g., the USAC and E-Rate Central E-Rate Forum online databases); and (c) for emails, the databases retained and maintained by the CMSD. Based on this review, we created individual “Segment histories,” meaning a compilation for each Segment of all the pertinent documents we could find, organized chronologically from the inception of the E-Rate process (pre-bidding) to the conclusion (reimbursement, if any).6 The specific categories of documents reviewed are the following:

6



The BAC Report and interim reports (October 1, 2013, January 23, 2013).



CMSD documentation provided, in four Sections, to the BAC in connection with its preparation of the BAC Report, including reports by outside audit firms, BBP Partners and Skoda Minotti.



Emails between the CMSD and the BAC for the period, 2008 through the release of the BAC Report in March of 2015.



Information relating to the CMSD’s participation in the E-Rate Program since 1998, including E-Rate support applied for, approved, and the “utilization rate” thereof, meaning the percentage of approved funds actually disbursed.



CMSD internal manuals, guidance documents, and charts relating to the District’s E-Rate Program procedures.



CMSD organizational charts and manuals reflecting job titles and responsibilities.



The CMSD’s E-Rate web page and materials available at: http://net2.cmsdnet.net/erate.



The results of external audits conducted by USAC, using third party accounting firms, of the CMSD’s participation in the E-Rate Program during specified periods.



Documents reflecting the CMSD’s engagement of E-Rate Central for E-Rate consulting services and services rendered pursuant thereto.



Bid packages, bid forms, contracts and related bidding materials (e.g., scope review meeting minutes, bid evaluation and tabulation forms, summary of findings) for each of

Copies of the four Segment histories, which are addressed in detail in Section V below, are in separate binders that are attached to this report collectively as Attachment 2. Some of the documents included are excerpts from otherwise voluminous documents. Some tabs are specially paginated because of multiple footnote references to the particular tab. The quality of the copies was dependent upon the legibility of the documents from which they were made. Further as the histories reflect, we were unable to find various E-Rate forms and other documents we would expect to find within the District’s files. Attachment 2 also includes charts summarizing, by Segment, key figures.

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the Segments, including such materials assembled and provided to the Auditor of the State of Ohio (“AoS”).7 

Sample Application and Certificate of Payment forms related to the technology work performed by Doan/Pyramid, LLC (“Doan”) and Zenith Systems, LLC (“Zenith”).



Documents found in the District’s E-Rate File Room, where we made two in-person visits.



Over 26,000 emails to and from key current and former CMSD personnel (in certain cases also including relevant people outside the District) during the period under examination.



Supplementary materials identified from electronic files retained by the District on shared drives relating to the Segments.



Statutory and regulatory materials relating to the Accelerated urban school building assistance program, including the applicable OSFC Design Manual.



Relevant meeting minutes and resolutions of the Board of Education of the CMSD.



Sample contracts for construction management and architectural services related to the new construction projects in the Segments.



Other potentially relevant materials provided by the CMSD to the AoS in connection with its separate inquiry.



Documentation relating to several sample E-Rate funding requests other than those at issue in the BAC Report.



Compendia of relevant FCC rules and decisions concerning the E-Rate Program.

B.

Interviews

In addition to our documentary review, we conducted in-person or telephone interviews with a total of twenty-five people, including those who were involved in some phase of the construction process and/or the E-Rate application process for each of the Segments.

The interviewees, their affiliations, and the date and method of the interview are as follows:8 

Wayne Belock, Chief Legal Counsel, CMSD – June 3, 2015.



Michael Bowen (telephone) – Director of Accounting, CMSD – December 17, 2015.



George Dallas (telephone) – President, Total Systems Integration, Inc. (“TSI”) (the technology design company for all the Segments) – September 4, 2015.



Marcus Dehler (telephone) - Director, Technology and Infrastructure Group, Zenith (the company that acquired the assets of Doan, which was the technology contractor for the other relevant Segments. Zenith was the technology contractor for Segment 4B) – August 5, 2015.

7

On April 21, 2015, the AoS announced that his office would conduct its own examination of the CMSD’s participation in the E-Rate Program and subsequent thereto the CMSD provided the AoS with a variety of documents as requested. The CMSD has provided us with all materials that it provided to the AoS, some of which we already had obtained and reviewed.

8

In addition to these people, we attempted to contact Michael Colosimo, formerly of Doan, and Fred Ahlborn, formerly of the OSFC, but were unable to locate them.

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9



Kenneth Demming – Enterprise Application Developer, CMSD – May 20 (telephone) and June 4, 2015 (in person).



Bernard Eichner – Programmer/Analyst, CMSD – July 9, 2015.



Angela Foraker (telephone) – Director of Procurement, CMSD (formerly with The Riley Law Firm, the District’s outside counsel for construction-related matters) – July 31, 2015.



Eric Gordon – CEO, CMSD – June 4, 2015.



Diana Grant – Finance Report Specialist, CMSD – July 9, 2015.



Winston Himsworth (telephone) – President, Tel/Logic Inc. d/b/a E-Rate Central (the District’s E-Rate consultant) – May 1 and May 4, 2015.



Roderick Houpe (telephone) – Chief Information Officer (“CIO”), CMSD – July 30, 2015.



Larry Johnston – Executive Director, Internal Audit, CMSD – June 4, 2015.



Dennis Kubick – Deputy Chief Financial Officer/Controller, CMSD – July 9, 2015.



Ilze Lacis – former Director – Budget, E-Rate and Telecommunications, Department of Management Information Systems, CMSD, and Executive Director of Procurement Department of Technology, CMSD (and until recently with E-Rate Central) – June 3, 2015 (in person) and December 16, 2015 (telephone).9



James Mix – Manager, Public Records Requests, Student Records and Paralegal Services, Legal Department, CMSD – May 19 and May 26, 2015 (telephone), June 3, 2015 and July 9, 2015 (in person).



Lina Paesani (telephone) – Construction Coordinator, CMSD - August 31, 2015.



Joseph Podach – former Deputy Chief, Technology and Procurement, CMSD – July 10, 2015.



Glenn Popil (telephone) – Construction Coordinator, CMSD – July 30, 2015.



David Riley – The Riley Law Firm – July 10, 2015 (in person) and December 11, 2015 (telephone).



Fred Rogers – Project Manager, Ozanne Hammond Gilbane Regency (“OHGR”) (the construction manager for all the Segments) – July 9, 2015.



Dedra Ross – Senior Purchasing Specialist, E-Rate, CMSD – June 4, 2005.



Gary Sautter – Deputy Chief, Capital Projects, CMSD – July 9, 2015 (in person) and January 6, 2016 (telephone).



Anita Spencer – former Specialist III, Information Services, CMSD – July 8, 2015.



Nora Svatek – former Director, Accounts Payable, CMSD – July 8, 2015.



Patrick Zohn – Chief Operating Officer, CMSD – July 9, 2015.

Ilze Lacis, Anita Spencer and Ms. Spencer’s replacement, Dedra Ross, worked directly on E-Rate matters. Ms. Lacis reported on E-Rate and other matters directly to Joseph Podach.

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3.

BACKGROUND ON E-RATE PROGRAM

The E-Rate Program is complicated, requiring the meticulous completion of detailed forms and filing them by prescribed deadlines at various stages in the E-Rate process.10 The BAC Report includes an outline of the overall processes and requirements, so we do not provide one here.11 However, the brief overview that immediately follows, focused on certain Program features we think are particularly relevant to our findings, serves to frame the later analysis and recommendations that are the heart of this report.

A.

The E-Rate Program: Historical Overview

The E-Rate Program was established pursuant to the Telecommunications Act of 1996. 12 As noted above, the Program is administered by USAC, subject to the ultimate oversight of the FCC, which promulgates the rules governing the Program.13 Initial financial support under the Program was provided to successful applicants starting in 1998. The support has been funded through contributions initially made primarily by telecommunications carriers into the Federal Universal Service Fund; the cost of these contributions is generally passed on to consumers.14 During the period examined in this report, the Program provided support to eligible K-12 schools for Telecommunications Services, Internet Access, Internal Connections, Basic Maintenance of Internal Connections, and, starting in Funding Year 2007, certain Miscellaneous Services.15 Originally, the FCC capped the E-Rate Program funding at a base of $2.25 billion per year. In 2010 this annual funding cap was indexed for inflation.16 More recently, the E-Rate Program fund size was expanded so that now

10

As observed by FCC Commissioner Rosenworcel in 2014, “the E-Rate Program is too complicated…. It has become too difficult and expensive for schools…to navigate our process…. That is just not right.” In the Matter of Modernizing the E-Rate Program for Schools and Libraries, Report and Order and Further Notice of Proposed Rulemaking, 29 FCC Rcd 8870 (2014) (“Modernization R&O”) (Statement of Commissioner Jessica Rosenworcel).

11

BAC Report, pp. 11-15.

12

See 47 U.S.C. §254(h)

13

47 C.F.R., Chapter 1, Subchapter B, Part 54, Subpart F.

14

The pass-through is generally reflected under the term, “Universal Service Charge or Fee,” on the phone bill.

Some 45 states have some form of separate universal service funds.

15

The FCC in 2014 issued two “modernization” orders which will phase out support for legacy voice services and put greater emphasis on support for connectivity of schools and classrooms to high-speed broadband.

Modernization R&O, supra; In the Matter of Modernizing the E-Rate Program for Schools and Libraries, Second Report and Order and Order on Reconsideration, 29 FCC Rcd 15538 (2014)(“Second R&0”).

16

In the Matter of Schools and Libraries Universal Service Support Mechanism, Sixth Report and Order, 25 FCC Rcd 18762 (2010)

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up to nearly $4.0 billion per year is available.17 The Program funding year runs from July 1 to the following June 30.

Despite periodic efforts to simplify the E-Rate application process, it remains complicated.

Initial applications for support are subject to routine and special compliance reviews, as well as post-funding audits. If USAC determines, after committing to provide a certain amount of support and the disbursement of any portion of that amount, that there have been violations of the applicable rules, it can seek to recover the funds. Applicants have the right to appeal first to USAC and then to the FCC, or to seek a rule waiver from the latter. 18 Because of the Program’s complexity, and the potential consequences of making mistakes, many individual schools and school districts, like the CMSD, hire consultants.19 B.

E-Rate Program Features Of Particular Relevance To Our Analysis 1.

Application Process Schedule

An applicant must first post with USAC an FCC Form 470 with an adequate description of products or services for which it seeks E-Rate support.20 Prospective vendors must then be given at least 28 days from the date of posting to submit proposals before any contract may be executed. If the applicant also issues a Request For Proposals (“RFP”) or, as was the case with the CMSD, a Bid Notice, the bidder response period must allow for the USAC-mandated 28-day period. Only thereafter may the applicant enter into a contract with the selected vendor and, during a USAC prescribed “window,” formally apply, by submitting FCC Form 471, 21 for specific E-Rate Program support for the contracted products or services.22 2.

Description Of Products And Services For Which Support Is Sought

In filing for support the applicant must provide USAC with sufficient details about, for example, the type, quantity, and cost of the equipment that the vendor is to provide and for which E-Rate support is being requested. This requirement is generally satisfied through an attachment in

17

See Second R&O, supra. This figure does not include any unused funds that the FCC authorizes, after notice from USAC, to be carried forward from prior Program funding years,

18

Under 47 C.F.R. §54.719, applicants or service providers “aggrieved by an action taken by” USAC have appeal rights. Only the FCC can waive its rules.

19

In the Matter of Modernizing the E-rate Program for Schools and Libraries, Notice of Proposed Rulemaking, 28 FCC Rcd 11304, 11363, ¶224 (2013) (“Modernization NPRM”) (“Applicants for E-Rate funds are required to complete approximately six FCC forms over the course of a funding year. Some applicants spend many hours not only filling out FCC forms and gathering required data, but also responding to questions from USAC and requests for additional information, including documentation. As a result, many applicants feel the need to hire consultants to handle these tasks.”).

20

The BAC Report summary referred to in footnote 11 above explains the role of the key forms in the application and invoicing process. BAC Report, pp. 13-15.

21

USAC assigns a Funding Request Number (“FRN”) to each selected vendor request. A single FCC Form 471 may cover multiple FRNs.

22

See 47 C.F.R. §§54.503, 54.504.

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response to Item 21 on the FCC Form 471. If the description is insufficient, the applicant will be required to provide more details until USAC is satisfied that it has enough information to determine whether the support requested is justified under the Program’s rules.

3.

Support Can Be Provided Only For Products And Services Which Are Eligible Under The Rules

Each year, USAC and the FCC determine what products and services, including categories of equipment, will be eligible for E-Rate support and produce a list before the application process commences.23 After receipt of the FCC Form 471 and Item 21 attachment, USAC’s Program Integrity Assurance (“PIA”) team reviews the application and supporting data before making a funding commitment, usually asking a variety of questions during the course of the review. It, therefore, behooves applicants to review their E-Rate applications carefully before submission to ensure that they are applying only for eligible products and services.

4.

An Applicant Must Be Able To Support The Calculation Of Its Claimed Discount Rate

An applicant must pay a portion of the cost of the products and services for which E-Rate support is sought. The applicant’s share is based on a “discount matrix” for which the minimum applicant share is 10%.24 The share is usually based on the percentage of students in the applicant’s schools eligible for free and reduced price lunches under the National School Lunch Act.25 The greater the percentage of such students the greater the “discount” the applicant is eligible to receive, or put another way, the higher the percentage of the cost USAC pays. An applicant specifies the discount percentage for which it believes it is eligible on its FCC Form 471. Then, if questioned by USAC, it must be able to provide USAC with credible data supporting the calculation of the percentage reflected on that form. Failing the provision of such data, USAC can reduce the percentage to be funded by the Program, and the applicant’s share of the eligible costs must increase.

5.

There Are Deadlines

Throughout the E-Rate process there are deadlines. These include deadlines for: (a) responding to USAC inquiries; (b) the initiation and completion of supported services, including the installation of equipment; (c) the submission of invoices to receive support;26 and (d) appealing USAC decisions relating to such support. Up to a point, USAC will grant extensions of certain

23

See http://www.usac.org/sl/applicants/beforeyoubegin/eligible-services-list.aspx

24

Starting in Funding Year 2015, the minimum share for Category 2 (formerly Priority 2) products and services was increased to 15%.

25

See 47 C.F.R. §54.505. There are also sanctioned alternative discount mechanisms. See http://usac.org/sl/applicants/step03/alternatives-discounts.aspx

26

47 C.F.R. §54.514 (relating to invoicing deadlines).

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deadlines, and the FCC has the authority to waive them for “good cause.” 27 But failure to track and meet deadlines can result in the denial or reduction of E-Rate funding.

6.

There Are Invoicing Options

An applicant has a choice as to how USAC will be invoiced for approved E-Rate support. It can pay the vendor 100% of the approved cost, and then seek reimbursement from USAC for the discounted share using FCC Form 472, the Billed Entity Reimbursement (“BEAR”) form.

Alternatively, the applicant can pay the vendor its non-discounted share and leave it to the vendor to seek reimbursement from USAC for the balance, using FCC Form 474, the Service Provider Invoice (“SPI”) form. The choice is the applicant’s. In most cases, the SPI would be preferable for the applicant since it does not need to pay 100% of the cost up front and then wait for reimbursement.28 7.

Obtaining Support For What Was Approved

Subject to allowable and approved “service substitutions,” applicants can ultimately obtain ERate support for products and services only as originally approved and then actually obtained or installed. For example, support approved for an item of equipment constituting Internal Connections cannot be obtained if the equipment was never acquired or was never installed and paid for. Invoices submitted to USAC must provide the requisite detail to allow verification that what was originally approved was in fact installed and paid for. If there are substitutions for the equipment originally approved, that equipment must also be “E-Rate eligible” and USAC generally must sign off before the equipment is acquired, installed, and paid for. If an invoice is submitted for different equipment which was not approved, USAC may refuse to pay the invoice even if the equipment is “E-rate eligible.”29 8.

There Are Document Retention Requirements

The E-Rate rules specifically require retention of documents relating to the E-Rate application process. In 2004, the Program rules were amended to require both the applicants and service providers to “retain all records related to the application for, receipt, and delivery of discounted services for a period of five years after the last day of service delivered for a particular Funding Year.”30 Recently, the retention period was increased to ten years.31 Failure to retain required documentation can lead to denial of funding or reduction of the funding amount to reflect only that information which the applicant can provide. The inability of an applicant to produce required documents in an audit can lead USAC to seek recovery of previously disbursed funds.

27

47 C.F.R. §1.3. Again, only the FCC may waive requirements of the applicable E-Rate Program rules. USAC has no authority to do so.

28

See http://usac.org/sl/service-providers/step05/default.aspx

29

See http://www.sl.universalservice.org/reference/ServiceSub.asp

30

In the Matter of Schools and Libraries Support Mechanism, Fifth Report and Order and Order, 19 FCC Rcd 15808, 15823, ¶47 (2004) (“Fifth R&O”).

31

See Modernization R&O, supra.

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C.

CMSD Participation In The E-Rate Program

In examining the CMSD’s participation in the Program, we reviewed: (a) overall E-Rate support committed and expended; (b) internal management; (c) internal guidelines to ensure compliance; and (d) external assessments of such compliance.

1.

Support Committed And Expended

The CMSD has participated in the E-Rate Program since its inception, receiving significant support in the process. During that period (from Funding Year 1998 through Funding Year 2015), based on available records, the CMSD has requested E-Rate Program funding totaling $438,862,581.90; received Program Funding commitments totaling $295,417,822.10; and benefited from disbursements totaling $194,186,913.80.32 These figures reflect an overall “utilization rate” of 65.7%, with the highest utilization rate being in Funding Year 1998 (95.9%) and the lowest being in Funding Year 2008 (39%).33 Based on figures that we reviewed, during Funding Years 2005 through 2013, the CMSD’s utilization rate trailed the nationwide average percentage by varying amounts. A determination of the specific reasons for this overall disparity was not within the scope of our engagement. We would note, however, that low utilization rates can reflect overly ambitious plans for projects that are not completed at all or are subsequently reduced in scope; projects that are postponed; or the failure to timely invoice.

2.

Internal Management And Responsibility

During the period related to the Segments, day-to-day management of the E-Rate Program was the responsibility of the Director – Budget, E-Rate and Telecommunications in the CMSD’s Department of Management Information Systems.34 At some point in the fall of 2010 or early 2011, management responsibility for the E-Rate Program was given to the Executive Director of Procurement in the Department of Technology.35 The Director and Executive Director reported directly to the Deputy Chief, Technology and Procurement.36

32

These data are based on compilations obtained from E-Rate Central’s online database as of December 20, 2015.

33

According to figures provided by E-Rate Central, the nationwide utilization rate during Funding Years 2005 through 2013 averaged 79.3% based on figures through April 3, 2015. The utilization rate can change over time as additional funds are disbursed.

34

Cleveland Metropolitan School District, Department of Management Information Systems, Organizational Chart and Job Descriptions, August 13, 2009. Attachment 3.

35

Cleveland Metropolitan School District, Draft Department of Technology Service Catalogue, October 2010.

Attachment 4. Ilze Lacis served in one or the other of these two positions until November of 2011. Previously, upon being hired full-time by the District in 2001, she served as Manager of E-Rate matters. In her initial interview, she could not recall precisely when she became the Director as reflected on the 2009 organizational chart, but it was before that chart was prepared. She was reclassified as Executive Director in February 2011. Ms. Lacis was assisted in E-Rate matters by Anita Spencer, Specialist III, Information Services, and starting in March of 2011, by Dedra Ross, Senior Purchasing Specialist, E-Rate. Ms. Ross remains with the District.

36

During the relevant period this was Joseph Podach.

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3.

Internal Guidelines

The CMSD had written internal guidance and procedures for handling “typical” E-Rate Program applications and invoicing (meaning, those related to schools that, unlike those at issue in the BAC Report, were not part of the OSFC construction program). Our document review included a February 25, 2002 manual (“Manual”) titled, “PROCESS FOR ERATE PROGRAM,” which addressed “Funding Request Objectives,” “Request For Proposal Process,” “RFP Proposal Evaluation and Selection Process,” “Separation of Eligible and Ineligible Services,” and the “Billing Process.” The Manual required, among other things, “separate invoices” for “eligible and ineligible costs” and sought to deter the use of the BEAR billing process explained above that required the CMSD to budget (and expend) 100% of the costs of E-Rate-eligible products and services and then seek reimbursement.37 An additional December 2003 document titled, “ERate Submission RFP Evaluation Process,” addressed a series of specific services and included rating forms for vendors to be considered by an Evaluation Committee.38 We believe, based on our interviews and the documents that we reviewed, that the District received significant E-Rate funding for various eligible products and services as a result of following these procedures with respect to other schools that, unlike those in Segments 2-4, were not part of the OSFC construction program. It appears that, to the extent that there were other major school construction projects over the years, the District did not apply for E-Rate funding.39 4.

CMSD E-Rate Program Audits

We also reviewed documentation relating to audits conducted on behalf of USAC by third party auditors for E-Rate Funding Year 2000 and Funding Years 2002-2006.40 These audits assessed the applicant’s compliance with a variety of Program requirements, based primarily on a review of documentation related to the applications in the Funding Years examined. Findings of noncompliance can lead USAC to seek recovery of support previously disbursed.41

37

According to Ilze Lacis, she drafted the Manual. Attachment 5.

38

Kenneth Demming, who was periodically involved in evaluating proposals for products and services for which the CMSD sought E-Rate support, confirmed that these procedures were followed in the cases in which he was involved. Ilze Lacis also said they were followed.

39

George Dallas of TSI stated that, in his experience, in the past this was the case. We know that no E-Rate support was sought in connection with Segment 1 schools. David Riley confirmed this. To our knowledge, no E-Rate support has been sought for subsequent segments to date.

40

The E-Rate Program rules specifically provide for such audits. 47 C.F.R. §54.516. It is not unusual, and can be expected, that an E-Rate Program of the dollar size of the District’s would be periodically audited by USAC.

41

See Fifth R&O, supra.

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In the earlier audit, the ultimate overall conclusion by USAC was that the CMSD was compliant with E-Rate Program requirements for the Funding Year in question. While there were minor findings, none of them warranted any recovery of E-Rate funds previously disbursed.42 The latter audit (referred to internally as the “mega-audit”) found no “Matters Related to Material Non-Compliance.” The audit did contain minor findings regarding compliance with rules relating to discount calculations and paying a service provider for service that was not delivered (i.e., $363).43 5.

Subsequent CMSD Compliance History

We found no documentation concerning subsequent audits or other evidence of rule noncompliance findings against the CMSD E-Rate Program.44 And, we found no evidence that USAC had sought to recover funds previously disbursed to the CMSD as a result of rule violations.45 The foregoing comments are not meant to minimize the deficiencies noted in the BAC Report and that led the District to commission us to conduct a more in-depth examination. They are made simply to contrast the District’s largely successful use of the E-Rate Program to subsidize the costs of eligible products and services for other schools with its largely unsuccessful use of the E-Rate Program to subsidize the technology package costs of the newly-constructed schools in the Segments. So the fundamental question, one posed by the BAC Report, is what made the outcome so different. As we explain below, we believe there was no single cause, but a combination of them.

42

We were unable to find the actual final audit report in this case. These conclusions were communicated in an email, dated July 8, 2004, from Ilze Lacis to Peter Robertson, former CIO for the CMSD, “In summary, USAC’s Internal Audit Division ‘…has concluded that the Cleveland Municipal School District is compliant with the Schools and Libraries Support Mechanism requirements for the funding year reviewed.’ Regarding the four items that were detailed in the auditors’ debrief to us, i.e. the ‘Management Response Detail,’ all four items state ‘No Recovery Required.’”

43

The auditors did report that they were “unable to assess compliance with” E-Rate Program competitive bidding requirements “as they related to $5,834,015 in disbursements” made during Funding Year 2007 (relating to support approved for Funding Year 2002) because the CMSD was unable to provide “sufficient detailed information.” However, this was “not considered an FCC rule violation since the CSMD was not required, by FCC rules or its own document retention policy, to retain such information” in Funding Year 2002 when the competition took place.

44

We did see evidence that USAC conducted selective Payment Quality Assurance reviews of certain invoices (i.e., to verify proper documentation to support invoices already paid). In addition, we understand that for Funding Year 2014 USAC conducted a Selective Review, a separate component of USAC’s PIA review process that follows up on certifications that applicants make on their FCC Form 471 about the competitive bidding process and the necessary resources to make effective use of requested services. We note that for Funding Year 2014 the CMSD has (as of December 20, 2015) received $3,097,110 in disbursed E-Rate support out of $5,014,478 committed.

45

This was confirmed in our initial interview with Winston Himsworth of E-Rate Central, which has provided Erate consulting services to the CMSD on an hourly or annual contract basis since 2003.

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4.

EXECUTIVE SUMMARY

We here provide a summary of our assessment and conclusions about the E-Rate support for Internal Connections in the Segment 2, 3A, 3B/4A and 4B schools that were the subject of the BAC Report. Separate analyses of the processes and circumstances in each of the individual Segments then follow.

First, contrary to a local press report46 which focused solely on the explicit terms of our engagement letter with the District, we did examine whether, as the BAC Report suggested, fraud and/or other illegal conduct played a role in the CSMD’s obtaining significantly less ERate Program reimbursement than it could have obtained had the Program rules been fully followed. The facts that: (1) Doan was the technology contractor for three of the four Segments, and that there were close ties between it and Zenith, the technology contractor for the fourth; (2) Doan was the subject of a federal corruption investigation during part of the period under review, and its President and owner, Michael Forlani, was convicted and sent to prison as a result; (3) the District’s Chief Operating Officer during part of the period under review, Dan Burns, was convicted of racketeering, theft and tampering with records; (4) there was the same technology design contractor, TSI, for all of the Segments and, likewise, the same construction manager, OHGR; and, finally, (5) the CSMD had the option, at least under the Program rules, to pay out of its pocket only its relatively small percentage share of the total technology costs to the contractor, but instead chose to pay the full amount and later seek reimbursement from USAC for the remainder (i.e., use the BEAR invoicing method), especially when it chose to pay only its share of the costs for most other schools over the course of its years-long participation in the E-Rate Program (i.e., use the SPI invoicing method), all piqued our interest and “raised our eyebrows.”

However, after spending nine months reviewing thousands of pages of hard copy documents and emails, and talking at length with relevant people, we found no evidence of fraud or any other kind of illegality.

As for the technology contractor selection process, per applicable State law, bids were publicly solicited and the lowest “responsive” and "responsible" bidder was selected in each case. In one of the Segments, Doan was the only bidder. In two of the others, Doan (or Zenith, as the case may be) was the lowest bidder. In the fourth case, the other bidder's bid was deemed "nonresponsive" because, according to the District's and OSFC's responses to questions posed by the BBP auditors, it was only a partial bid and the rules required a bid on the full package. 47 The District went to some lengths to encourage multiple bidders, but some prospective ones (notably, AT&T and IBM) were deterred by certain provisions (relating to liability limitations, indemnities, and warranties) that the State refused to modify. And, Doan/Zenith was not just the lowest responsive bidder; it also was a "responsible" one. "Responsibility" essentially meant a

46

Patrick O’Donnell, “Cleveland schools will spend $550 per hour to sort out $8.5 million rebate failure,” Cleveland Plain Dealer, April 18, 2015 See http://www.cleveland.com/metro/index.ssf/2015/04/cleveland_schools_will_spend_5.html

47

According to David Riley, the District’s outside construction counsel, “responsive” in general meant that the required bid and a bond had been timely provided.

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track record of successful contract performance, and Doan had a track record of high-quality projects, completely in a timely fashion, and within budget.

The federal corruption investigation of Doan, and the subsequent conviction of its President and owner, were wholly unrelated to the matters at issue in the BAC Report. Likewise, the conviction of the District's former Chief Operating Officer was wholly unrelated to the matters at issue in the BAC Report. The timing of these investigations and convictions was merely coincidental with part of the period under review in the BAC Report.

According to David Riley, TSI had been the technology design consultant for Segment 1 schools. Eventually, the differing architects (which, per Gary Sautter, the District's Deputy Chief of Capital Projects, were selected by a Request For Quotations (“RFQ”) process under the auspices of OSFC) selected TSI to do the design work for the Segment 2-4 schools. According to Sautter, OHGR was likewise hired pursuant to an RFQ process under the auspices of OSFC. And, as we explain elsewhere, we learned that there were financial advantages to the District from choosing the BEAR invoicing method for the Segment schools.

In short, then, every circumstance that raised in our minds the specter of potential illegality or impropriety when we began our work turned out, upon careful review, to have an "innocent" explanation.

We conclude that no single factor led to the outcome detailed in the BAC Report. Instead, a series of factors, some applicable to all Segments, some only to one or two, and none nefarious or intentional, explain why the District ultimately received only a fraction of the E-Rate Program funding that USAC had approved. And, while the key players did not act malevolently or deliberately, they bear full responsibility for badly mismanaging the District’s participation in a Program (as to the schools at issue in the BAC Report) that could and should have been used to minimize the costs to Cleveland’s taxpayers of certain kinds of technology support for the city’s neediest schools during the period in question.

We find these factors to be the following: 

48

Generally, The District Had Sound Procedures In Place To Maximize E-Rate Funding, Which Procedures It Largely Followed, But No Such Procedures For The New Construction Schools At Issue In The BAC Report – The District’s E-Rate Office created detailed procedures for every phase of the E-Rate Program funding process, from bidding to invoicing, and, from what we could tell, those procedures were largely followed for other eligible products and services and they were generally successful in maximizing Program funding. But, the new school construction process, including the technology packages associated with the Segments, was governed by procedures established by the OSFC and the statute governing it.48 Those procedures were not developed with the E-Rate Program in mind, and, accordingly, E-Rate Program requirements were largely regarded as a secondary priority or an afterthought. Even when

Ohio Rev. Code §3318.38 (“Accelerated urban school building assistance program”); see, e.g., Ohio Rev. Code §3318.10 (Advertising and awarding of construction bids); §3318.12 (Transfer and disbursement of funds); see generally Ohio School Design Manual, available at, http://ofcc.ohio.gov/Resources/DesignManual(OSDM)/2008OSDM.aspx

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it should have become apparent to the District that OSFC procedures were out of sync with E-Rate Program requirements, there appears to have been no effort on the District’s part to try to modify those procedures or to impose additional ones more in line with the established E-Rate procedures that had generally worked well. This factor affected all Segments.

49



The Economics Of The OSFC Process Encouraged The CMSD To Front E-Rate Eligible Costs And Then Seek Reimbursement From USAC Later – The economics of the OSFC funding process in effect encouraged the CMSD’s use of FCC Form 472 BEAR submissions to obtain the E-Rate funding for which it was eligible. Under the OSFC’s rules, the State would provide 68% of the funding for newly-constructed schools like those in the Segments. In addition to that funding, the District could then apply for E-Rate funding to pay the applicable discount rate for E-Rate eligible technology products and services. So, for example, if the cost of the technology package for a new school were, for simplicity’s sake, $1 million, and the District’s E-rate discount percentage was 86%, the District would receive $680,000 in funding from the State and could receive as much as an additional $860,000 from USAC to subsidize the cost of that package. The E-Rate Program rules would not permit the State to share in the District’s E-Rate funding. The excess over the $1 million actual cost of the technology package, thanks to the availability of E-Rate support, went right back into the District’s coffers. In the end, the use of BEARs was both a blessing and a curse. It was a blessing for the foregoing reason. It was a curse for two reasons. First, not only did the use of BEARs mean that the District had to pay all of the invoiced technology package costs up front and then seek a refund from USAC for the excess over its relatively small portion of those costs when it could have paid only its percentage and let the technology contractor fend for itself, the use of BEARs put an even greater responsibility on the District to ensure that the contractor’s invoices were available, accurate, and satisfied USAC requirements. Had the alternate SPI form of billing been used, as it was for a vast number of other E-Rate applications by the CMSD, the onus would have been on the contractor to meet these requirements in order for it to get paid the discounted share to which it was entitled. Second, given the already generous State support for newly-constructed schools, when problems arose as to E-Rate deadlines or other requirements there ultimately was a relatively lackadaisical attitude about the need to “go all out” to secure additional funding through the E-Rate Program. This factor affected all Segments.



E-Rate Breakout Was Required At The Front Of The Process But Not At The Back To Support Invoices – The technology bid packages that we reviewed generally required the winning contractor to provide a detailed breakout, separating equipment eligible for ERate funding from ineligible equipment, shortly after (in some cases by a specific date) being awarded the contract.49 These breakouts were to be used to complete the Item 21 attachment to the FCC Form 471 application for E-Rate funding. However, upon invoicing the CMSD for payment at the “back end of the process,” there was no requirement that the contractor provide such a breakout of the equipment actually installed and invoiced and to match that equipment list with the equipment list approved by USAC

For example, the bid packages for Segment 4B schools required the E-Rate breakout to be provided by January 27, 2010.

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for funding.50 This time-consuming exercise ultimately was left for the District’s E-Rate personnel to perform once they received the relevant contractor invoice data.51 Putting the onus on these personnel made the payment process much more time consuming and complicated than it needed to be.52 This factor affected all Segments. 

Proper Invoices Difficult To Obtain – Even though it was left to the District’s E-Rate Office to ensure that the BEAR forms were timely submitted to USAC with invoices that accurately reflected what E-Rate eligible equipment was installed and whether the list of installed equipment matched the list of equipment approved by USAC in granting the funding commitment, the E-Rate Office personnel had to pull teeth to get the invoices.

Incredibly, the District did not require that the E-Rate Office sign off on the invoices before the Finance Department paid them, or even that the E-Rate Office receive a copy of them. For example, the documents we reviewed for Segment 2 reflected the E-Rate personnel searching for invoices over a period of many months.53 Likewise, in Segment 4B, the CMSD personnel were “turning over every rock to find this information.”54 This factor affected all Segments.



Revision To The Invoicing Process Was Never Requested – When it became apparent after the first Segment (Segment 2) that, absent a change in procedures, this burdensome matching task was going to be required for the other Segments, we found no indication

50

For example, OHGR’s form of Pay Application Checklist made no reference to E-Rate funding. Among others, Marcus Dehler of Zenith noted that the invoices submitted to the District in accordance with State requirements were in a “different format” from that required by USAC, which required “installation details.” (Only one interviewee, George Dallas of TSI, said that the District had invoices with these details, but we found no evidence of that. We believe that he confused the upfront post-bid E-Rate breakouts with what should have been required at the invoicing stage.)

51

Joseph Podach confirmed in his interview that the matching task fell to the E-Rate Office.

52

For example, email correspondence from Ilze Lacis indicated that this matching process for Segment 2 took several months between at least June 2009 and December 2009. Email from Ilze Lacis to Michael Colosimo, dated June 15, 2009, “Mike, We also need the line item costs for the equipment, with the attendant invoices for which you billed the District, i.e., the line item costs for the installed tech equipment, matched up with the invoice. Then, we will match up the equipment with the list that E-Rate approved. Thanks, Ilze;” Email from Ilze Lacis to Gary Sautter, dated December 2, 2009, “Gary, I believe that we can expect the funds at the end of January. I am meeting w/Doan for a final review and reconciliation of installed to invoiced to E-Rate approved next week Wednesday. Following that, we will do a random verification of installed equipment before submitting the invoices to E-Rate. Usually, invoice turnaround is between two to six weeks. I expect a self-report audit on the invoices due to the high dollar figure. We have reconciled (roughly) two thirds of the dollars that E-Rate approved.”

53

Email from Anita Spencer to Nora Svatek, dated October 17, 2008, “Good morning Nora, I wasn’t sure who I should ask…. So I decided to start with the ‘All Knowing.’ Can you please tell me how I can get copies of complete invoices for the following Doan Pyramid invoices [invoice numbers omitted]. They all should note ‘Segment 2.’ Thanks;” Email from Anita Spencer to Nora Svatek and Diana Grant, dated September 16, 2009, “Good morning Nora and Diana, I am in need of your help once again. I am making a final attempt to retrieve the invoices noted below (with the exception of [invoice numbers omitted]). I am in dire need of these invoices to seek reimbursement from the government funded E-rate program. In the past, the nine invoices were not recovered; I am hoping one final search may produce them. I have attached information regarding the invoices.”

54

Email from Joseph Podach to Ilze Lacis, dated February 18, 2015, “I trust everyone is still turning over every rock to find this information.” On the other hand, it appears that with respect to invoices under other E-Ratesupported contracts, the District’s E-Rate Office personnel did have a role in pre-payment review.

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that there was ever any demand by or request from the CMSD to the construction manager or the contractor to prepare E-Rate segregated invoices matched to the original E-Rateapproved list of equipment expected to be installed. When we interviewed David Riley, the District’s outside counsel for construction projects, he said that if this request had been made the contractor would have been required to comply. This factor affected all the Segments. 

The CMSD Was Unable To Justify Discounts Sought – When called upon by USAC to justify “discount levels” (i.e., the percentage discount that an applicant is entitled to receive based usually on the percentage of students eligible to receive free or reduced price lunches through the National School Lunch Program) used to calculate overall ERate funding requests, the CMSD was apparently unable to produce the data to satisfy USAC. As a result, in making final E-Rate Funding Commitment Decisions, USAC reduced discount percentages to levels that matched the documentation that the CMSD could provide. Ultimate E-Rate commitments for Segments 2 (where the discount was reduced from 90% to 86%) and 4B (where the discount was reduced from the originally requested 87% to 85%) were affected, resulting in reduced amounts approved for E-Rate funding.55



CMSD Had No System For Tracking Key Deadlines – There was no system for tracking key E-Rate deadlines.56 The result was that filings repeatedly “slipped through the cracks.”57 The CMSD was fortunate that some missed deadlines had no monetary impact (e.g., the failure to file FCC Form 486 for Segment 4B until months after it was due when FCC granted a waiver; filing the BEAR reimbursement form for Segment 3A one day late). The Segment 3B/4A filing omission, which came even after there was a written commitment by Ilze Lacis – in November of 2009 and again in March of 2010, long before the ultimate invoicing deadline of January 2011 – to begin the process of compiling invoices,58 was the most costly, with more than $5 million at stake. However, this factor affected all Segments.

55

Email from Ilze Lacis to Joseph Podach, dated July 19, 2011, “The District’s discount has been an issue for many years.” We note below that for Segment 4B the District sought to raise the discount percentage to 88% after USAC received its application but did not seek a commensurate higher funding commitment.

56

Ilze Lacis conceded this to be the case in her interview, adding that tracking deadlines was Anita Spencer’s responsibility. When asked in her interview whether there was a calendar or schedule put together to track E-rate deadlines, Anita Spencer said that she did not recall anything like this, although she did say that she had a “tickler” system. In any case, we found no evidence of any such system.

57

Email from Ilze Lacis to Joseph Podach and Dedra Ross, dated July 13, 2012, “NOTE! There is a problem with this Form 486 submittal: it was not submitted in time. The Commitment Letter is dated March 1, 2011. This was Anita Spencer’s last week, the height of RFP evaluations, taking on the Procurement area, Dedra’s arrival, other hiring/interview activities, etc. Submitting the 486 slipped through the cracks.” (emphasis in original).

58

Email from Ilze Lacis to Joseph Podach, dated November 30, 2009, “This was the ‘in limbo’ discount level for the FY 2008-09 which was connected to the funding cap beginning with the 86% discount. Invoice submittal should flow better for this round, as I submitted these funding requests by site; thus we can submit invoices by site and receive reimbursement by site. I will contact Doan to start the process for the sites where implementation is complete.;” Email from Ilze Lacis to Joseph Podach, dated March 8, 2010, “GOOD NEWS: the Segment 3 technology equipment in FY 2008-2009 has been approved. This was the District’s funding that was in ‘limbo’ when the funding cap was put at 86%; funding for 87% was unknown at that time. We’ve received the approval

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

The Technology Packages Were Bid Before Construction Designs Were Completed – According to various change orders we reviewed, to take advantage of prospective E-Rate funding, the technology packages were bid before construction designs of the related schools were completed. Changes in the design between the bid package stage and the installation of the technology equipment once the schools were actually built contributed to differences between the amount of E-Rate funding initially approved and that ultimately disbursed.59 Key parties were aware of the likelihood of this problem from the start.60 As George Dallas of TSI, the technology design contractor, observed at one point: “We have done an almost complete re-design on these e-rate schools already because we were so far out in front of the architect so we could get the e-rate dollars….”61 This factor affected all Segments.



No Coordination Of Construction And E-Rate Schedules – The school construction schedules, including the installation of E-Rate-approved equipment, were not coordinated with E-Rate schedules so that E-Rate-approved equipment was installed within the prescribed E-Rate period. For example, the CMSD was unable to obtain reimbursement for $238,766.93 in equipment in Segment 2 because it was installed outside the required E-Rate performance period. In Segment 4B the pre-discount amount for George Washington Carver school was recently reduced by $249,838.40 although the CMSD62 was warned that technology installation and invoicing for Segment 4B “can be no earlier than July 1, 2010.”63 We acknowledge that the District may have had little choice, given

letter. The service provision is through September 30, 2010. We will work with Doan Pyramid/Zenith Systems re the invoicing.”

59

In his interview Fred Rogers of OHGR said that as much as two years could pass between the technology package bid and equipment installation. Gary Sautter said that technology was usually the last thing to go into the building.

60

In his initial interview, David Riley said that those involved in the process knew that this was going to happen and there was no way around it given the construction rules that they were dealing with.

61

Email from George Dallas to Daniel Burns, dated November 21, 2008.

62

This date was apparently later adjusted to August 1, 2010. Email from Andrew Eisley to Tammy Carnevale, dated August 21, 2015, “For Carver there was $249,838.40 in work that may have been completed prior to August 1, 2010 (the service start date on the 471). At this point in time it is unclear how much of the $249,838.40 was completed prior to August 1, 2010. Therefore, out of an abundance of caution we will assume that all of the $249,838.40 was completed prior to August 1, 2010. We will further assume that all of the work was E-rate eligible. This reduction will decrease the undiscounted amount on line 7392363 from $255,627 to $5,788.60. We authorize you to make this adjustment. We do not know the specific installation dates for the various pieces of equipment, but we do know that at least $5,788.60 of E-rate eligible equipment was installed between August 1, 2010 and April 30, 2012.”

63

Email from Ilze Lacis to Dennis Kubick, dated May 28, 2010, “Please remember that the technology implementations and invoicing dates for Carver, Mound and Hale can be no earlier than July 1, 2010. This is a hard and fast rule with no appeal recourse.” Under E-Rate rules, equipment installed or invoiced before that start date would not be reimbursed. (This email, titled “E-rate reimbursement for Segment 2 sites,” was addressed to Mr. Kubick, the District’s Deputy Chief Financial Officer/Controller, because the primary purpose of it was to apprise him of the status of Segment 2 invoice review in anticipation of eventual reimbursement. Messrs. Podach and Sautter were copied.)

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the push to complete the projects64, but the point remains that another contributing factor was the disconnect between the District’s construction schedule and E-Rate Program authorized installation timelines. 

Equipment Changes Not Communicated In Advance To E-Rate Personnel – Where there were to be changes in the equipment installed from that submitted to USAC with the initial application for E-Rate funding, we found no indication that these changes were communicated to CMSD E-Rate personnel in advance by the technology contractor or the construction manager. Had those changes been communicated, the District might have been able to get USAC’s approval for “service substitutions,” depending on whether the kind of equipment substituted was likewise eligible for E-Rate reimbursement and whether applicable deadlines were met.65 For example, the construction manager was warned in one case that any service substitutions had to be approved before differing equipment was purchased.66 This factor affected all Segments in which there were technology equipment change orders.67



Submissions Seeking Funding For Ineligible Equipment - The internal CMSD E-Rate process developed and used in E-Rate applications other than those at issue in the BAC Report provided for a review by the E-Rate Office of funding requests prior to submission to USAC to ensure that E-Rate ineligible products and services were not included.68 However, there was no such requirement for the Segment schools. Instead, it appears, either because of the length of time it took to get the raw data, the volume of it, the complexity, or otherwise, that the CMSD simply left the task to USAC as part of its PIA review. As a result, for example, some $653,872.40 was stripped from the Segment 3B/4A original funding request. This led to the misperception on the BAC’s part that USAC was denying the District funding to which it was entitled. This factor affected all the Segments.

64

In the agenda for the November 5, 2008 MIS Executive Team meeting it was noted that “OHGR is pushing to have tech equipment installed….” In his interview Joseph Podach observed that the District was moving forward on projects very fast. Fred Rogers said his job was to get the building up and running.

65

George Dallas stated that any changes to the equipment which was the basis for the winning bid had to be approved via a change order. We found documentation for a variety of change orders in the various Segments.

66

Email from Ilze Lacis to Joseph Dougherty, dated February 17, 2009, “Joe—one more thing re an E-Rate equipment substitution. We should submit the equipment substitutions before September 1, 2009 – at the latest; earlier would be better. It takes anywhere from two to eight weeks to get approved, i.e., to be certain that the substitution request is approved before you buy the equipment.;” Email from Ilze Lacis to Joseph Podach, dated November 5, 2009, “There are minor discrepancies between the original equipment list and the items installed, e.g., quantities, exclusions, different model. When we complete the initial invoicing, I will see if we can legitimately recoup some of the remaining funds via equipment substitution. This may be problematic as it is after the fact.” There is no indication that any additional funds were recovered by equipment substitution for Segment 2.

67

We noted this March 4, 2009 “MIS Executive Team Meeting Agenda” item, under “Project Management,” “Information from the construction manager is non-existent. Stresses that MIS needs to be invited to the construction meetings – will go[,] needs a schedule of the meetings.”

68

The Manual stated that “particular attention must be given to the selected service provider SOWs clear separation of eligible and ineligible services” and the fact that the “eRate Division will serve as the primary monitoring organ for eligibility….” Manual, Part 4/Separation of Eligible and Ineligible Services and Products, p. 6.

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

Attention To Detail Affected By Personnel Transformation That Added Responsibilities And Caused Internal Dissention – While we cannot gauge the impact with precision, we believe that the wholesale personnel “transformation” in late 2010 and early 2011 had some impact on the E-Rate Office’s attention to deadlines and other ERate Program details.69 As part of that process, certain CMSD employees (including those in the E-Rate Office) were required by then CMSD CEO Eugene Sanders to tender their resignations and re-compete for their jobs, creating a distraction and causing a lack of focus.70 Similarly, the expansion of job responsibilities for Ilze Lacis when she became Executive Director – Procurement, without providing her with additional E-Rate Office staff and denying her request to co-locate with other Procurement staff, contributed to the breakdown. Finally, our interviews in particular included comments about strained working relationships among key people in the E-Rate management chain that had to have affected focus.71 These factors seemed to have affected Segment 3B/4A.



E-Rate Funding Was Not A Priority For New Construction Projects – As noted earlier, E-Rate was not a prerequisite or priority under the OSFC process or rules.72 When we interviewed Joseph Podach, the former District official in charge of Technology and Procurement and the person to whom the E-Rate Office reported, he said that the E-Rate process created “heartaches” and added that he did not think that the District should have gone to the trouble of seeking E-Rate funding for the new school projects. We believe this ambivalence about the merits of E-rate funding and the conviction that completing the projects was the highest priority contributed to the lack of follow-through on preparing a BEAR form for Segments 3B/4A in 2013 when it was “discovered” that none had yet been filed. Not only was no BEAR form prepared and filed, not even a request for extension of the invoicing deadline was prepared and filed. This issue affected Segment 3B/4A in particular.



Document Retention Practices – Based on the documents we reviewed, the District did not comply with the E-Rate Program document retention requirements. The histories we prepared reflect missing documents, including communications to and from USAC, that clearly fall within the broad document retention requirements.73 We believe that the lack

69

This was mentioned in email messages that we reviewed where deadline extensions were requested or deadlines were missed. See, e.g. Email from Ilze Lacis to Joseph Podach and Dedra Ross, dated July 13, 2012, “This was Anita Spencer’s last week, the height of the RFP evaluations, taking on the Procurement area, Dedra’s arrival, other hiring/interview activities, etc.”

70

Joseph Podach called it a “really dark period” in the District and said that people were asked to do the same work but take a $20,000 pay cut. He said that this added stress in every Department throughout the District. Some employees, including Anita Spencer, ultimately were not rehired.

71

Anita Spencer felt that Ilze Lacis had not fulfilled commitments made concerning her professional development.

Ilze Lacis felt that she was performing functions that should have been handled by Joseph Podach. Others commented negatively about Mr. Podach’s follow through.

72

David Riley in his interview confirmed that there was nothing in the District’s agreement with the OSFC that required the District to seek E-Rate funds. Joseph Podach said E-Rate was not an OSFC requirement. Fred Rogers said OHGR did not track the District’s E-Rate efforts. It was a rebate that was outside of OSFC’s Project Agreement.

73

In particular, as noted in the Segment histories, other than Segment 2, we did not find the post-application, precommitment communications between the CMSD and USAC’s PIA that we would normally see in files maintained as a result of a comprehensive document retention program. This constrained our ability to

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of a comprehensive centralized E-Rate document retention system contributed to the inability to readily lay hands on information when needed to respond to USAC queries and justify support requested. 

5.

Realistic Prospects For Recovery Of Additional Reimbursements Are Limited To Segment 4B - There are two Segments - 3B/4A and 4B - where the CMSD has a possibility of obtaining additional E-Rate reimbursements. For Segment 3B/4A, the District, through E-Rate Central, finally (on December 17, 2015) filed a request with USAC to extend the invoicing deadline, which was originally January 28, 2011. Given an FCC ruling that we explain later, we expect USAC to deny the request and any appeal of that denial to the FCC also to be denied. Therefore, we expect no reimbursement of any portion of the $5.82 million originally approved for Segment 3B/4A. For Segment 4B, because of equipment installed before August 1, 2010 in the amount of $249,838.40 related to George Washington Carver school, the maximum potential reimbursement is now $427,979.96. USAC initially denied any reimbursement because the District submitted one day late certain additional documentation requested. But the District's appeal to USAC to reverse the denial and consider the additional information was approved on December 18, 2015. A revised BEAR form was submitted to USAC on January 14, 2016. Still the fact that the District cannot verify installation dates for this equipment jeopardizes even this recovery.

FINDINGS AND ANALYSIS

In this section, we detail, as best we can, the steps, and missteps, that led to the difference in each Segment between the amount of E-Rate funding USAC approved, and the amount the District ultimately received, as well as the document trail that led to the particular results.

A.

Segment 2 1.

Introduction

The “Segment 2 schools” were: (1) Mary B. Martin; (2) Mary M. Bethune; (3) Hannah Gibbons; (4) Franklin D. Roosevelt; (5) Daniel E. Morgan; (6) Miles Park; (7) Warner; and (8) James A. Rhodes. The one FRN for this segment was 148739, and the relevant E-Rate Funding Year was 2006-2007. According to the Certifications of Contract Completion,74 Doan completed work on the technology packages for these schools between November 2007 and August 2009.

understand and explain some of the decisions that were made, such as the decision not to appeal the dramatic reimbursement reductions in Segment 3A. We found no documentation supporting the District’s response to the BAC that those reductions by USAC were justified because the District had included ineligible equipment in its reimbursement requests for these schools.

74

According to Fred Rogers of OHGR, the Certification of Contract Completion indicates that all contract work, change order work, training, and all outstanding cost issues have been reconciled with the prime contractor for the particular project.

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2.

Pre-Contract

The original funding commitment request was for $4,671,628.20. USAC ultimately committed to fund $3,109,751.07. The amount actually disbursed to CMSD was $2,870.984.14, reflecting a “utilization rate” of 92%, by far the highest utilization rate of the Segments.

The bid packages date was December 5, 2005. There were packages of the same date for each of the eight schools.75 Two of the bid books, 6 and 8, required the winning bidder to separate out the technology equipment to be installed into that which was eligible for discount/rebate under the E-Rate Program and that which was not. No deadline for such a breakout was specified, however.76 The bid form itself did not include the E-Rate breakout requirement.77 The FCC Form 470 requesting services and establishing eligibility was posted on the USAC website on December 19, 2005.78 The pre-bid meeting date for prospective bidders was January 4, 2006. Both Ilze Lacis’ and Anita Spencer’s signatures appeared on the sign-in sheet79, and the meeting agenda listed them under CMSD introductions.80 However, there were no specific references to E-Rate on the agenda.

The bid submission and opening date was January 24, 2006. 81 There were two bidders, Doan and Midwest Concepts.82 A scope review meeting was held on February 1, 2006, after the bid opening and before the award of the contract to ensure that there was a mutual understanding of the required work.

While there was no reference to Ms. Lacis or Ms. Spencer on the agenda, the meeting minutes did note that the “technology contract must be signed no later than February 16 th [2006] to meet E-Rate eligibility.”83 Doan completed a bid evaluation form, which is a questionnaire in the nature of a background check, on February 1, 2006.84

75

Attachment 2, Segment 2, Vol. I, Tab 2.

76

Attachment 2, Segment 2, Vol. I, Tab 2, pp. 14-18.

77

Attachment 2, Segment 2, Vol. I, Tab 3.

78

Attachment 2, Segment 2, Vol. I, Tab 4.

79

Attachment 2, Segment 2, Vol. I, Tab 5, p. 6.

80

Attachment 2, Segment 2, Vol. I, Tab 5, p. 1.

81

Attachment 2, Segment 2, Vol. I, Tab 7.

82

Attachment 2, Segment 2, Vol. I, Tab 10.

83

Attachment 2, Segment 2, Vol. I, Tab 8.

84

Attachment 2, Segment 2, Vol. I, Tab 9.

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The construction manager, OHGR, submitted a summary of findings to the District on February 8, 2006 evaluating the two bidders, and concluding that Doan was the “apparent low bidder.”

Doan’s bid came in at $7,059,103, while Midwest Concepts’ was $7,145,648.88.85 Doan signed a contract with the District on February 10, 2006.86 3.

Post-Contract, Pre-USAC Commitment

The FCC Form 471 to apply for discounts was filed by the District with USAC on February 16, 200687, listing Ilze Lacis as the point of contact. The pre-discount funding commitment request was for $5,190,698; with a 90% discount, the initial funding commitment request was $4,671,628.20.

USAC’s Form 471 Receipt Acknowledgement Letter (“RAL”) was dated February 27, 2006. 88 The FCC Form 471 Item 21 attachment listing the equipment to be installed was sent separately to USAC on March 15, 2006 by email from Ilze Lacis. The submission included an “E-Rate breakdown report for each school, reflecting EQ Code, P[ART]N[UMBER], MFGR, DESC[RIPTION], U[NIT] o[f]M[EASURE], QTY, U[NIT]. [PR[I]C[E]. [and] EXTEND.” 89 Unlike the case with other Segments, the files did contain numerous communications between USAC’s PIA team (principally, Dave Cosgrove) and the District (Ilze Lacis) in furtherance of PIA’s attempts to determine exactly what equipment the District proposed to install and which of those items was eligible for a discount or rebate. The initial set of such communications covered the period, April 13, 2006-May 26, 2006.

For example, an April 13, 2006 PIA letter to the District stated: “[T]he documentation provided in the Item 21 attachments is not sufficient to determine the eligibility of your request. The documentation does not clearly identify the products/services being requested in this FRN. Please provide more detailed documentation that identifies actual products and services being requested. If your documentation does not identify the specific products and services such as make, model, description of product/service being delivered, you will need to contact your vendor and request such documentation. The vendor should be able to provide you with detailed documentation. Any documentation provided should clearly identify any ineligible charges that were cost allocated out of your request. If you are unable to justify the eligibility of charges requested on your Form 471, the request may be reduced or denied.”90

85

Attachment 2, Segment 2, Vol. I, Tab 10.

86

Attachment 2, Segment 2, Vol. I, Tab 11.

87

Attachment 2, Segment 2, Vol. I, Tab 12, pp. 1-14.

88

Attachment 2, Segment 2, Vol. I, Tab 13.

89

Attachment 2, Segment 2, Vol. I, Tab 14.

90

Attachment 2, Segment 2, Vol. I, Tab 15, p. 3.

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Ms. Lacis responded in part as follows in an email on April 21, 2006, “ …[T]he response is incomplete for item #2 (James Ford Rhodes and Warner schools) regarding their discount percentage. The executive director for food services has not been available this week… I will supply the information to you, as quickly as I can get the it (sic) in front of him. …The list of equipment for each of the five technology component packages for FRN 1489739 do (sic) not include the list of equipment. I asked the service provider to forward such a list. They are preparing the list of equipment they plan to implement. It is taking much, much longer than originally indicated. I am to have some response early next week. …I regret the many requests for extensions. I am now back on track and hopefully you have not put a black mark by my name. I know how time-sensitive this is for you – and for our students to receive the services more quickly.”91 Ms. Lacis sent a follow-up response on May 5, 2006, “I have requested the service provider to forward as quickly as possible a list of the equipment comprising the technology packages noted below. I hope to receive the list the week of May 8th and will forward the list forthwith.”

Attached was a revised Form 471 Item 21 attachment with a summary chart, still showing the pre-discount request amount of $5,190,698.92 Such communications continued after the above-noted period. For example, Ms. Lacis wrote on May 26, “I have spoken several times with the vendor, Doan Pyramid, who informed me…that I should have some information mid-week next week. It is my understanding that Doan will have only a partial list of equipment for one, possibly two, of the technology packages at that time.

Can PIA give the District an extended deadline? The district should not be penalized, if the potential service provider is not presenting the detail requested in the most timely manner possible.”93 On June 9, Ms. Lacis begs “to have another extension and [for] your understanding,” citing other duties related to the “District’s end-of-year budget closings….”94 A summary of the total amounts requested in each of five categories (cabling, PBX, wireless, network electric, and video MPEG) ) and equipment list was finally submitted on June 15 95, at which time Ms. Lacis reduced the pre-discount amount requested from $5,190,698 to $3,391,265 to remove the cost ($1,799,433) of a video package. Ms. Lacis added that she had asked Doan to advise her of the cost of the PBX package because “clearly there are E-Rate ineligible items in the list,” as per an attached chart.96 She pledged to,“…pursue the service provider to provide a timely response. Upon receipt of their response, I will timely forward it to you.” Therein she refers to a RAL response of the same date 97 reflecting the removal of the 91

Attachment 2, Segment 2, Vol. I, Tab 15, p. 5.

92

Attachment 2, Segment 2, Vol. I, Tab 15, p. 28.

93

Attachment 2, Segment 2, Vol. I, Tab 15, p. 55.

94

Attachment 2, Segment 2, Vol. I, Tab 15, pp. 57-58.

95

Attachment 2, Segment 2, Vol. I, Tab 15, p. 65.

96

Attachment 2, Segment 2, Vol. I, Tab 15, p. 63.

97

Attachment 2, Segment 2, Vol. I, Tab 16.

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video package. She does not explain in that response whether the video package of the video package was removed because the equipment was not eligible for reimbursement or because it was not installed. The revised pre-discount funding commitment request, then, was, at that point, $3,391,265, still at the 90% discount level.

There were additional communications between PIA and the District between June 19, 2006 and October 26, 2006. For example, a June 19, 2006 letter from PIA again found the documentation submitted on June 15 to be inadequate and required a “complete list of every line item cost for each technology package – Cabling, PBX, Wireless and Networks.”98 The same request was made by PIA on June 28, 2006.99 On June 27, 2006, Doan’s Michael Colosimo emailed Ms. Lacis asserting that, “[t]he bid forms were not clear as to the term, ‘component pricing defined.’ Needless to say our bid did not breakout (sic) erate eligible product. I have gone back and revised our actual numbers based on what is and what isn’t eligible. Please see the attached spreadsheet for line item pricing per school. I believe this is accurate and should meet ERate approval.”100 On July 5, 2006, Ms. Lacis submitted a 76-page spreadsheet101 to PIA, citing Doan’s June 27 explanation for the delay. She then had a phone conversation on July 12 with PIA, and, as result, sent yet another revised equipment list to PIA on July 25. On October 9, 2006, PIA asked whether the revised July 25 list was final. Ms. Lacis responded on October 17 by sending a third set of lists and re-revising the pre-discount funding commitment request upward from $3,391,265 to $3,813,267.22, adding back in certain video equipment and making further modifications.102 4.

Post-Funding Commitment Decision, Including Invoicing And Reimbursement

On November 14, 2006, USAC issued a Funding Commitment Decision Letter stating that a commitment of $3,109,751.07 was “as yet unfunded” because, at that point, it was unsure of the availability of Priority 2 funds.103 USAC issued its final Funding Commitment Decision Letter on April 3, 2007, committing to fund $3,109,751.07 based on a further adjusted pre-discount request of $3, 615,989.62.104 This

98

Attachment 2, Segment 2, Vol. I, Tab 17, p. 3.

99

Attachment 2, Segment 2, Vol. I, Tab 17, p. 9.

100

Attachment 2, Segment 2, Vol. I, Tab 17, p. 6.

101

Attachment 2, Segment 2, Vol. I, Tab 17, pp. 11-90.

102

Attachment 2, Segment 2, Vol. I, Tab 17, pp. 169-250.

103

Attachment 2, Segment 2, Vol. II, Tab 18.

104

Attachment 2, Segment 2, Vol. II, Tab 19.

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reduced amount was “to remove costs for Cisco WLAN Location Tracking and Access Control Server/Software.” Further, the discount rate was reduced from 90% to 86% to reflect “what could be validated by third party data.” The letter lists the “Last Allowable Date for Delivery and Installation of Non-Recurring Services” as September 30, 2008.

The Form 486 Receipt of Service Confirmation Form was filed on April 16, 2007.105 USAC acknowledged it by issuing a Form 486 Notification Letter on April 25, 2007.106 The initial invoicing deadline, based on a September 30, 2008 delivery date, was January 28, 2009. During the period, January 5, 2009-April 13, 2010, the CMSD submitted a series of invoicing extension requests.107 The last of these was granted on April 13, 2010, which reset the invoicing deadline to August 11, 2010.

We found a number of emails pointing to a frantic search for detailed invoices so that the BEAR form could be submitted to USAC as soon as possible. Examples include the following: October 17, 2008 email from Anita Spencer to Nora Svatek, “I wasn’t sure who I should ask…so I decided to ask the ‘All Knowing.’ Can you please tell me how I can get complete invoices for the following Doan Pyramid invoices…”

June 12, 2009 email from Ilze Lacis to Dennis Kubick, “Dennis, I wish to update you regarding the status of the E-Rate program’s reimbursement for the Segment 2 new construction schools. I have requested, and hope to receive approval, for a time extension submitting invoices to ERate. I have been waylaid time-wise with completing the District’s technology plan, which must be submitted and approved by the eTech/State by June 30th. E-Rate and Title I (possible other programs) are dependent on the Tech Plan’s timely submission… The invoicing extension does not mean other priorities have changed; I know how critical the funds are. The invoices require detailed, careful review, so all is in the best order possible, so they pass the invoice reviewer and any future audits. The timeframe I had previously provided to you will, most likely be extended at least 3-4 weeks.”

June 15, 2009 email from Joseph Podach to Ilze Lacis, “Ilze, I would really prefer the invoices to be submitted ahead of the deadline without extension. The last thing we need is that the extension is not granted and we would be sitting here saying ‘we’ll appeal!’ That answer won’t fly. If there is anything I can help with let me know.”

June 15, 2009 email from Joseph Podach to Michael Colosimo at Doan, “For final submission of invoices to the SLD we need the supporting documentation from Doan that lists the exact equipment installed, location, and all serial numbers. This is a requirement of the E-rate program and should have been submitted with the invoice. The district cannot complete the BEAR form without this information in hand…Your prompt attention is needed.”

105

Attachment 2, Segment 2, Vol. II, Tab 20, pp. 1-3.

106

Attachment 2, Segment 2, Vol. II, Tab 20, pp. 4-9.

107

Attachment 2, Segment 2, Vol. II, Tab 21.

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June 15, 2009 email from Ilze Lacis to Michael Colosimo, “Mike, we also need the line item costs for the equipment, with the attendant invoices for which you billed the District, i.e., the line item costs for the installed tech equipment, matched up with the invoice. Then, we will match up the equipment with the list that E-Rate approved.”

September 16, 2009 email from Anita Spencer to Nora Svatek, “I am in need of your help once again. I am making one final attempt to retrieve the invoices noted below… I am in dire need of these invoices to seek reimbursement from the government funded E-Rate program. In the past, the nine invoices were not recovered; I am hoping one final search may produce them.”

On March 16, 2010, the District submitted a BEAR form seeking reimbursement of $3,109,761.07.108 We found no accompanying invoices.

USAC issued its Form 472 BEAR Notification Letter on March 24, 2010109, refusing to reimburse any money at all because the BEAR had been received one day after the then current extension deadline (March 15, 2010).

As noted above, an additional extension was granted to USAC. USAC issued a second Form 472 BEAR Notification letter on June 4, 2010110, presumably because the BEAR was resubmitted and reconsidered by virtue of the April 13, 2010 grant of an invoice extension to August 11, 2010. We were unable to find a copy of a second BEAR form. USAC authorized reimbursement of only $2,870,984.14 because there had been “Service Delivery/Install Outside FY” (i.e., equipment had been installed too early or too late). The failure to install the equipment within the prescribed timeframe cost the District $238,766.93 in reimbursement.

5.

Segment 2 Summary Assessment

So, with regard to the Segment 2 schools, there were multiple problems. The District revised its pre-discount request amount twice (downward and upward). There was confusion on its part as to what equipment was eligible for reimbursement, and an inability to justify the initial 90% discount rate. There were multiple requests for extensions, and missed deadlines even after extensions were granted. And, this was the “best segment,” meaning the District obtained nearly all of the money (a 92% utilization rate) USAC ultimately committed to disburse.

The removal of the ineligible Cisco equipment reduced the final pre-discount requested amount by $197,277.60. The District could justify only an 86% discount, and this cost it $144,639.58 (i.e., 4% of $3,615,989.62). Finally, the District lost another $238,766.93 because of installation of eligible equipment outside the allowed time period.

It should not have taken three tries for the District to submit a list containing only equipment eligible for a discount. It appears that the District ultimately relied on USAC to separate out what was ineligible. Further, it is surprising that the District was unable to justify the discount rate it had initially sought. And, installing equipment “out of time” is attributable to the fact that

108

Attachment 2, Segment 2, Vol. II, Tab 22.

109

Attachment 2, Segment 2, Vol. II, Tab 23.

110

Attachment 2, Segment 2, Vol. II, Tab 24.

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there was no coordination between the construction schedule and the E-Rate funding schedule.

The construction team proceeded at its own pace, installing items, including substituted items, when they were ready to be installed, without coordination with the District’s E-Rate office and the E-Rate Program funding schedule.

B.

Segment 3A 1.

Introduction

The “Segment 3A schools,” and corresponding FRNs, were Artemus Ward (1602186); Buhrer (1620280); Garfield (1620307); Patrick Henry (1620343); and R.G. Jones (1620373). The relevant E-Rate Funding Year was 2007-2008. According to the Certifications of Contract Completion, Doan completed work on the technology packages for these schools in the AprilMay 2010 period.

The USAC funding commitment originally requested for Artemus Ward was $684,113.76. After excluding the costs of ineligible equipment, USAC’s funding commitment was $663,894.18. Of that amount, only $124,588.55 was actually disbursed, constituting a utilization rate of 19%.

The USAC funding commitment originally requested for Buhrer was $610,106.64. After excluding the costs of ineligible equipment, USAC’s funding commitment was $590,311.22.

The amount actually disbursed was $108,792.33, a utilization rate of 18%.

The USAC funding commitment originally requested for Garfield was $660,191.84. After excluding the costs of ineligible equipment, USAC’s funding commitment was $640,725.54.

The amount actually disbursed was $151,266.72, a utilization rate of 24%.

The USAC funding commitment originally requested for Patrick Henry was $646,660.08. After excluding the costs of ineligible equipment, USAC’s funding commitment was $628,475.94.

The amount actually disbursed was $216,583.66, a utilization rate of 34%.

The USAC funding commitment originally requested for R.G. Jones was $675,882.24. After excluding the costs of ineligible equipment, USAC’s funding commitment was $656,799.62.

The amount actually disbursed was $238,302.68, a utilization rate of 36%.

In total, then, USAC committed to fund $3,180,206.50 for this Segment, but actually disbursed only $839,533.94, an overall utilization rate of 26%.

The key passage in the BAC Report relating to Segment 3A is as follows: “To date, the District has not provided a clear, firm explanation for its failure to obtain the remaining $2.34 million.

District responses to BAC inquiries suggest, however, that the primary reason is that technology equipment installed by Doan Pyramid did not match the equipment list included in CMSD’s initial application to USAC. According to the District, that original equipment list was supplied to the CMSD E-Rate Office by Doan Pyramid, which, the BAC was told, based the list on plans and specifications compiled by the technology design engineer, TSI. The E-Rate Office has provided the BAC with copies of the Doan-supplied equipment lists on which the application was based, but the Office has not provided the BAC with any documentation of equipment actually installed.”111 The District told the BAC that, “The E-rate Office, at the time, was 111

BAC Report, p. 5.

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surprised that the installations – compared to the proposal against which the E-rate funds were requested – was [sic] so low… The E-rate Office had no knowledge there would be such a change and such a wide difference.”112 2.

Pre-Contract

The Form 470 requesting services and establishing eligibility was duly posted on USAC’s website on November 27, 2006.113 A bid package, of the same date (with one addendum dated December 21, 2006), for prospective bidders was prepared, consisting of two books.114 Only the first bid book referenced E-Rate, and it required the winning bidder to provide a “detailed, ERate, Unit Price breakout” within two weeks of the contract award date. The minimum breakout required was by “line number, part number, part manufacturer, part description, part quantity, part unit price, and extended part price.”115 CSMD held a pre-bid meeting on December 13, 2006. The attendee sign-up sheet included Ilze Lacis’ signature.116 Though E-Rate was not listed as an agenda item, Ms. Lacis’ name is listed on the agenda under introductions for CMSD.117 The bid submission and opening date was December 28, 2006.118 Two technology contractors bid, Doan and Sarcom. In its later response to an E-Rate-focused pre-BAC Report by the audit firm, BBP Partners, the District and the OSFC explained that Sarcom’s bid was determined to be non-responsive because the bid package requested a bid for technology work at all of the schools in the Segment and Sarcom’s bid covered only some of the schools.

A scope review meeting was held on January 10, 2007. E-Rate is not noted on the agenda as a discussion item, and Ilze Lacis was not listed, either, but Joseph Podach was listed under CMSD introductions.119 The January 29, 2007, summary of findings designated Doan as the low bidder. No reference to E-Rate was included.120

112

BAC Report, p. 6.

113

Attachment 2, Segment 3A, Tab 1.

114

Attachment 2, Segment 3A, Tab 2, pp. 1-16.

115

Attachment 2, Segment 3A, Tab 2, p. 14.

116

Attachment 2, Segment 3A, Tab 4, p. 4.

117

Attachment 2, Segment 3A, Tab 4, p. 1.

118

Attachment 2, Segment 3A, Tab 4, p. 3.

119

Attachment 2, Segment 3A, Tab 6.

120

Attachment 2, Segment 3A, Tab 9.

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There are subsequent emails expressing determination that the technology equipment Doan proposed to install be separated into E-Rate eligible and ineligible before the submission of the FCC Form 471 Item 21 attachment.

For example, Ms. Lacis wrote to Mr. Podach on February 1, 2007, “To date, I have no information regarding the Doan bid contract for Segment 3 tech packages. I need to know the dollars, and would like to review the package so I don’t run into the hurdles I did last time – separate out the eligible from ineligible dollars. I was fortunate to have a ‘simpatico’ reviewer for the previous submittal; this may not be the case for this year’s submittals.”

To the same effect is a January 29, 2007 email from Mr. Podach to George Dallas at TSI, “The biggest concern at this point is getting the contract signed. Second is knowing the eligible v. ineligible pricing. The detail (part numbers/quantities) can follow for the Item 21 attachment, although if it is available it would be appreciated.” Mr. Dallas’ response, “Ya (sic), I knew that but I want to make sure that Fred [Rogers at OHGR] keeps heat on Doan to get it to us.

Basically, we got the Doan stuff the last time and made sure it matched our parts list and e-rate breakout and then processed it so Ilze had clean sheets.” 121 Mr. Dallas had just written to Mr. Rogers, “The District will need the E-Rate breakouts (detailed sheets) for e-rate filing purposes within the next few weeks. We should review these since they need to be ‘purified’ (remove any non-erateable items.) In the past, we received a spreadsheet from Doan, we reviewed it, commented on it, we forwarded to District. Once we get the lists, we’ll review and then consult with Joe Podach if any changes are required. I believe that it is important to get these from the Contractor [Doan] quickly. I believe for e-rate purposes, the breakouts need to be listed on the contracts even though they are NOT the basis for award.”

The District’s contract with Doan was signed on February 1, 2007.122 3.

Post-Contract, Pre-USAC Commitment

We found no post-contract E-Rate breakout documents, as required by the bid package terms and as desired by the parties referenced in the emails above.

With the contract signed, the District filed the FCC Form 471 to apply for discounts on February 8, 2007.123 The original total funding amount requested, pre-discount, for all five schools was $3,723,812. With an 88% discount, the funding commitment request was $3,276,954.56. These amounts were later adjusted to a final pre-discount request of $3,613,871. With an 88% discount rate, the final funding commitment request for this Segment was $3,180,206.50. The original undated Item 21 attachments, with breakouts per school, reflect the original pre-discount amount

121

Assuming the “last time” refers to Segment 2, there were repeated indications that the lists provided for that Segment were not sufficiently detailed to satisfy USAC’s PIA reviewers. See, e.g., April 13, 2006 PIA letter to District quoted on p. 23, supra.

122

Attachment 2, Segment 3A, Tab 10.

123

Attachment 2, Segment 3A, Tab 11, pp. 1-4. We did not find the complete original FCC Form 471 in the District’s files, only the certification portion.

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on the Form 471. However, the original Item 21 attachments did not break out the E-Rate eligible equipment from E-Rate ineligible equipment.124 We reviewed a Form 471 RAL from USAC dated February 14, 2007, reflecting the preadjustment amounts for the pre-discount and funding commitment request contained in the original Form 471.125 We did not find documents reflecting the typical back and forth between PIA and CSMD. However, we did find an undated spreadsheet titled, “Ineligible Product Spreadsheet with Modifications Based upon Applicant Item 21.”126 For each school, it reflects the “Original FRN Requested Amount;” the “Ineligible/Reduced Amount;” (a total of $109,940.20 in “ineligible products” for the five schools); and the “New Modified FRN Amount.” We also found an undated Summary Sheet and detailed per school lists that each totaled the New Modified FRN Amount for that school.127 It appears, then, at, some point, a detailed list was provided by the District to USAC, and the changes on the summary sheet apparently reflect PIA’s determinations as to what equipment was, in fact, E-Rate eligible.

4.

Post-Funding Commitment Decision, Including Invoicing And Reimbursement

The Funding Commitment Decision Letter was dated October 2, 2007, approving the modified funding commitment of $3,180,206.50 and noting that this amount reflected the removal of $109,941 in ineligible products.128 The letter lists the “Last Allowable Date for Delivery and Installation of Non-Recurring Services” as September 30, 2008.

We were unable to locate the Form 486 Receipt of Service Confirmation Form or USAC’s Form 486 Notification Letter.

On September 2, 2008, USAC granted the CMSD’s August 13, 2008 request to extend the service implementation date by a year to September 30, 2009. 129 We found Ms. Lacis’ email to Mr. Podach notifying him of same, but we did not find the District’s request itself.

Based on the September 2, 2008 service implementation extension, the last allowable invoicing date was changed to January 29, 2010. While we did not find a copy, the District must have requested a further invoicing extension because, by letter dated March 25, 2010,130 USAC extended the invoicing deadline to July 24, 2010, four months after the date of the letter.

124

Attachment 2, Segment 3A, Tab 11, pp. 12-17.

125

Attachment 2, Segment 3A, Tab 12.

126

Attachment 2, Segment 3A, Tab 13, pp. 1-3.

127

Attachment 2, Segment 3A, Tab 13, p. 4.

128

Attachment 2, Segment 3A, Tab 14.

129

Attachment 2, Segment 3A, Tab 15.

130

Attachment 2, Segment 3A, Tab 17.

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31

We found no copies of the BEAR forms the District submitted to USAC. Indeed, we learned from the CSMD’s responses to BAC inquiries that Ms Lacis, in April, 2014, then at E-Rate Central, was herself seeking copies from USAC and was told that there were no hard copies because they had all been filed online.131 The USAC BEAR Notification Letters, dated July 23, 2010, all made drastic reductions in the amount approved for disbursement from the amount USAC had originally committed, and without explanation.132 No appeal was ever filed, with the CMSD claiming in response to BAC queries, “there was no basis for an appeal” because “the disbursement decision was per the program’s rules and regulations.”133 (As the BAC Report noted, the rules allow any USAC decision to be appealed, in the first instance to USAC, and, then, if unsuccessful, to the FCC).

The CMSD explained to the BAC that the $2.34 million reduction “…reflected items under which we sought reimbursement and USAC determined were ineligible for reimbursement.”134 The District’s other explanation was that the difference was attributable to “technology that was not installed.”135 After a diligent search of the available records, we found no documentation definitively corroborating either of these explanations. While there was the Item 21 attachment that listed the equipment to be installed in the Segment 3A schools, we were unable to locate a list of the equipment that actually was installed. For all we know, depending on exactly what was installed and how much of it was E-Rate eligible, the CSMD may well have gotten all of the reimbursement monies for this Segment to which it was entitled. It is equally possible, again depending on exactly what was installed and how much of it was E-Rate eligible, that the District, had it appealed, would have gotten a higher reimbursement. Without the list of equipment installed, it is simply impossible to say.

As with other Segments, we did, however, find a variety of change orders 136 which were necessitated by the fact that the technology packages were issued for bid prior to the finalization of the construction designs so as to try to meet the E-Rate funding cycle. This would certainly contribute to there being differences between the equipment listed in the Item 21 attachment and that actually installed, and those differences could have implicated reimbursement eligibility and USAC service substitution requirements. (See, for example, an email dated December 10, 2008, from Chris Smith at the architectural firm, ThenDesign Architecture, to Gary Sautter, giving his

131

Email from Ilze Lacis to USAC, dated April 17, 2014, “Could you please include the BEAR form itself….”

Email response from USAC to Ms. Lacis of same date, “Ilze, Here is a list of the BEAR forms filed for these listed FRN’s and it appears that they were all filed online, so like we discussed, there is not a ‘copy’ we can send.”

132

Attachment 2, Segment 3A, Tab 18.

133

BAC Report, p. 8.

134

CMSD’s Answers to BAC Queries Regarding Segment 3A, Attachment 6, p. 19.

135

CMSD’s Answers to BAC Queries Regarding Segment 3A, Attachment 6, p. 1.

136

Attachment 2, Segment 3A, Tab 20.

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blessing to a change order, ”Yes. This was due to the e-rate funding. We knew we would encounter some changes, but the e-rate savings far outweighed the potential change.”).

We found no discussion of appealing USAC’s ultimate funding determination in either the hard copy documents we reviewed or the emails. Likewise, our interviews shed no light on why no appeal was filed. Again, though it might have been unsuccessful, appealing was an option.

C.

Segment 3B/4A 1.

Introduction

The “Segment 3B” schools were Wade Park, Harvey Rice, East Clark, and Willson; the “Segment 4A” schools were Euclid Park, Thomas Jefferson, Charles Dickens, Adlai Stevenson, Robert H. Jamison, Anton Grdina, and Charles Lake. There was a single FRN for this segment, namely, 1756906, and the relevant E-Rate Funding Year was 2008-2009. According to the Certifications of Contract Completion, the technology packages for these schools were completed between April 2010 and March 2012.

As explained in the BAC Report, USAC initially committed to fund $5.83 million for this Segment (after stripping out $653,872.40 in ineligible equipment to set the pre-discount amount at $6,703,949.60 with an 87% discount factor).137 The BAC concluded that the prospect of recovering any money at this point was “remote” because the District had missed the deadline for seeking reimbursement by submitting the BEAR form with the required documentation showing the technology equipment Doan installed and the Doan invoices the District paid.

To say that the District had “missed the deadline” is a gross understatement. The deadline was January 2011. The BAC started inquiring about this Segment in June 2013, and, soon after that point, nearly three years after the deadline, the CMSD told the BAC that the District had only begun “compiling the required paperwork,” with plans to submit it nine months later, June 2014.138 Understandably, the District assumed that USAC would refuse to grant such a lengthy invoicing extension, but it planned to appeal, if necessary, to the FCC. As of the date of the BAC Report, nine months later, March 2015, the District still had not submitted the paperwork to USAC. Finally, on December 17, 2015, yet another nine months later, the District’s consultant, E-Rate Central, submitted a request for USAC to extend the District’s invoicing deadline for this FRN.139 The District gave several reasons for the failure to timely seek reimbursement: (1) delays in the government’s decision as to whether E-Rate funds were available for the applicable E-Rate Funding Year, 2008 at the 87% discount level; (2) the passage of time (nearly two years) from the time the applications were submitted to USAC and USAC approval; (3) the fact that it took over a year for the technology equipment to be installed in the schools; and (4) the complexity

137

In actuality, the District would have been able to recover in reimbursement only approximately $5.23 million because one of the schools, Charles Lake, was not built.

138

BAC Report, p. 4.

139

Attachment 2, Segment 3B/4A, Tab 17.

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of the “progress of the technology implementations and building close out.”140 We found evidence in the record to substantiate the claim that all of these problems were factors contributing to the District’s failure to obtain the monies USAC committed to provide, but they do not explain why, so long after these problems were past, the District is only now starting the process of attempting to obtain reimbursement. Indeed, to this date, more than two years after the BAC started inquiring, and nearly five years after the deadline, a request for extension has only very recently been filed.

2.

Pre-Contract

The FCC Form 470 for this Segment was posted on USAC’s website on November 8, 2007. 141 The bid packages, of the same date, included three addenda filed on November 21, December 10, and December 13, all of that year.142 There were separate bid packages of the same date for: (1) Anton Grdina and “Segment 4 All Schools Combination” (two books);143 (2) Euclid Park, Charles Dickens, Thomas Jefferson, and “Segment 4 All Schools Combination” (two books);144(3) Harvey Rice, East Clark, Wade Park, and Willson (two books); and (4) Robert Jamison, Adlai Stevenson and “Segment 4 All Schools Combination” (two books). 145 The bid forms themselves provided that “within ten days after award of the contract, the successful bidder shall be required to prepare and submit a detailed item by item, unit price breakout of the items contained in the E-Rate unit prices contained on the bid form....”146 A pre-bid meeting was held, for all books, on November 20, 2007. Ms. Lacis’ signature appears on the meeting sign-in sheet,147 and the agenda shows that E-Rate was discussed.148 The minutes show that Ms. Lacis referred attendees to this E-Rate website, http://web04.cmsd.net/erate/,149 and noted that adhering to the requirements noted therein was important.

The bid submission and opening date was December 20, 2007. Doan was the sole bidder.

140

CMSD’s Answers to BAC Queries Regarding Segment 3/B/4A, Attachment 7, p. 5.

141

Attachment 2, Segment 3B/4A, Tab 2.

142

Attachment 2, Segment 3B/4A, Tab 1, pp. 2-7.

143

Attachment 2, Segment 3B/4A, Tab 1, pp. 39-56.

144

Attachment 2, Segment 3B/4A, Tab 1, pp. 57-73.

145

Attachment 2, Segment 3B/4A, Tab 1, pp. 1-38 (Harvey Rice et al.), 74-91 (Robert Jamison et al.).

146

Attachment 2, Segment 3B/4A, Tab 1, p. 24.

147

Attachment 2, Segment 3B/4A, Tab 3, p. 2.

148

Attachment 2, Segment 3B/4A, Tab 3, p. 5.

149

We were not able to access this web page. The District’s current E-Rate http://net2.cmsdnet.net/erate/default.htm.

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web page is

Scope review meetings, one for Segment 3B schools and the other for Segment 4A schools, were both held on January 4, 2008, with separate agendas and minutes.150 Both sets show Mr. Podach and Ms. Lacis as attendees, but no discussion of E-Rate appears on either agenda.

The District’s James Mix provided us by email on May 26, 2015 with an electronic copy of the contents of a disk containing a summary sheet and E-Rate breakout for both Segment components, reportedly dated January 4, 2008.151 We reviewed bid evaluation forms for Doan, a January 7, 2008 one for Segment 4A 152, and a January 9, 2008 one for Segment 3B.153 There was no reference to E-Rate in either.

A January 14, 2008 summary of findings154 noted that Doan was the sole bidder.

There were signed contracts with Doan for each Segment dated January 21, 2008.155 3.

Post-Contract, Pre-USAC Commitment

We found no post-contract E-Rate breakout documents, as required by the bid package terms.

The FCC Form 471156 was submitted just before midnight on February 7, 2008, the last day of the filing window, and it listed Ms. Lacis as the point of contact. The pre-discount funding amount requested was $7,357,822; with an 87% discount rate, the funding commitment request was for $6,401,305.14. These amounts were later adjusted so that the final pre-discount request was for $6,703,949.60157; with an 87% discount, the funding commitment request amount was $5,832,436.15.158 While we located the January 4, 2008 list mentioned above, we were not able to find the required Item 21 attachment submitted to USAC.

150

Attachment 2, Segment 3B/4A, Tab 5.

151

Attachment 2, Segment 3B/4A, Tab 6.

152

Attachment 2, Segment 3B/4A, Tab 7, pp. 2-4.

153

Attachment 2, Segment 3B/4A, Tab 7, pp. 6-8.

154

Attachment 2, Segment 3B/4A, Tab 8.

155

Attachment 2, Segment 3B/4A, Tab 9.

156

Attachment 2, Segment 3B/4A, Tab 10, pp. 1-55.

157

This pre-discount amount included $759 (at $63.25 per month) for maintenance services that the District had originally erroneously categorized as equipment rather than recurring services. The change in classification had no dollar impact on the total amount approved by USAC.

158

This included $660.33 for the maintenance services.

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USAC’s Form 471 RAL is dated February 13, 2008159, providing that any corrections the District had to make were due by March 4, 2008. The RAL was missing pages 2 and 4, we should note, and we found no RAL submission indicating that any correction was needed.

As with Segment 3A, we did not find the typical back and forth correspondence between PIA and the District regarding this FRN in the files. But, we know that there were such communications. For example, in September 2013 when the BAC started inquiring about this and the other FRNs at issue in its report, Ms. Lacis, by then at E-Rate Central, emailed Dedra Ross at the District “the list of equipment that was sent to USAC and PIA for review…[with] notations in red font of the changes that were made during the PIA.” 4.

Post-Funding Commitment Decision, Including Invoicing And Reimbursement

There is a January 22, 2009 Funding Commitment Decision Letter (missing page 2) indicating that the FRN at $5,832,436.15 was “as yet unfunded.”160 At that point, E-Rate Priority 2 funds were not available to be awarded at the 87% discount level (and lower).

On December 3, 2009 USAC issued a Funding Commitment Decision Letter approving the commitment of $5,832,431.15.161 The letter notes some $654,631.40 in “ineligible product(s)/services.” And, it notes that the pre-discount request was modified from $7,357,822 to $6,703,949.60 “to agree with applicant documentation.” Presumably, this comment referred to the Item 21 attachment that PIA reviewed to determine what was eligible and ineligible. The letter designates “Last Allowable Date for Delivery and Installation of Non-Recurring Services” as September 30, 2010, which meant that the invoicing deadline was January 28, 2011.

We were unable to locate the FCC Form 486 Receipt of Service Confirmation Form, but USAC acknowledged receipt of that form by its Form 486 Notification Letter to the District of December 23, 2009.162 We have found no indication that any invoice extension request was ever made. The District’s responses to the BAC suggest that none was ever made. And, as noted above, no BEAR was ever prepared or submitted.

We did find a number of change orders,163 for Segment 4A in particular, that were necessitated by the fact that the technology packages were issued for bid prior to the completion of the construction designs to meet the deadline for applying for E-Rate funding. These change orders would help to explain why equipment actually installed differed from the equipment that was to be installed, and those differences could have implicated E-Rate eligibility and USAC service

159

Attachment 2, Segment 3B/4A, Tab 11.

160

Attachment 2, Segment 3B/4A, Tab 12.

161

Attachment 2, Segment 3B/4A, Tab 14.

162

Attachment 2, Segment 3B/4A, Tab 15.

163

Attachment 2, Segment 3B/4A, Tab 18.

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substitution requirements. A good example is found in a change order dated April 10, 2010 relating to the Charles Dickens school, “This change order is a result of the technology design being completed ahead of the architectural/electrical/building design. This was an arrangement that was negotiated with OSFC early on in an effort to maximize an e-rate savings of about $9 million. As a result, there were coordination issues that needed addressing post-bid – in this instance, there were rooms that required technology and electrical swapping as well as additional cabling and outlets. Going forward, this will no longer be the practice.”164 We found a number of emails demonstrating an awareness that efforts needed to be made to obtain the necessary invoices so as to submit the BEAR form, either in a timely fashion, or based on an invoicing extension. Examples of such messages, organized chronologically, follow.

Ilze Lacis to Joseph Podach on November 30, 2009, 13 months before the invoicing deadline.

“While I do not have the formal letter in hand, the E-Rate [website] shows this morning that we have received the funding for the Segment 3B/Segment 4 technology implementations for Harvey Rice, East Clark, Wade Park, Willson, Jamison, Adlai Stevenson, Charles Dickens, Euclid Park, Thomas Jefferson, Anton Grdina, and Charles Lake. This was the ‘in limbo’ discount level for the FY 2008-09 which was connected to the funding cap beginning with the 86% discount. Invoice submittal should flow better this time round, as I submitted these funding requests by site; thus we can submit invoices by site and receive reimbursement by site. I will contact Doan to start the process for the sites where the implementation is complete.”

Ilze Lacis to Joseph Podach on March 28, 2010, 10 months before the invoicing deadline.

“Good news: The Segment 3 technology equipment in FY 2008-2009 has been approved. This was the District’s funding request that was in ‘limbo’ when the funding cap was put at 86%; funding for 87% was unknown at that time. We’ve received the approval letter. The service provision is through September 30, 2010. We will work with Doan Pyramid/Zenith Systems re the invoicing.”

Ilze Lacis to Joseph Podach on September 10, 2013, 32 months after the invoicing deadline.

“The Segment 3/Segment 4 sites were part of the 2008-2009 funding cap debacle. They were in the 87% discount band…, with the decision letter dated December 3, 2009. However, no BEAR was timely filed. I have no explanation for you, other than I do remember saying to Anita that we must file the form; the last date to invoice was January 28, 2011. Bottom line: we need to file the BEAR form immediately. It will be denied. We will appeal the denial. The ultimate result or decision is unknown. I have to scour the time period to see what was going on so there is a firm and clear rationale why this did not get done.”

Ilze Lacis to Dedra Ross on September 11, 2013, again 32 months after the invoicing deadline.

“We need to prepare a BEAR form ASAP for the FRN, which includes all of the schools. A/P (or Nora Svatek or Bernie Eichner) can provide you copies with full and complete invoice, which has the full list of equipment installed in each school, including Serial Numbers for each piece of equipment…. It is very important that we begin immediately. The initial BEAR submittal will be denied, after which I will prepare and submit an appeal/waiver request.” (emphasis in original).

164

Attachment 2, Segment 3B/4A, Tab 18, p. 68.

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“…Have we submitted the paper work to the erate program by which we’ll get a denial?”

Joseph Podach to Ilze Lacis on November 19, 2013, five months after the initial BAC inquiry (namely, June 2013) and 34 months after the invoicing deadline. Ms. Lacis replied the same day as follows, “…No on the BEAR. I’ve not yet completed the review of the invoices as of yet.

Any chance that Dedra [Ross] could pitch in?” “…Nancy flat out asked in our meeting ‘did you just miss it?’ and the answer is yes. We did miss this one filing…” Joseph Podach to Patrick Zohn on November 22, 2013, five months after the initiation of the BAC inquiry and 34 months after the invoicing deadline.

“I won’t disagree that we missed a filing date but we have not been denied the reimbursement from the erate program. We will file the BEAR form and expect the denial, at which time we’ll submit an appeal to the FCC for the funding.” Joseph Podach to Patrick Zohn on January 16, 2014, seven months after the initiation of the BAC inquiry and 36 months after the invoicing deadline.

Responding to a query from Joseph Podach about the BEAR filing, Ms. Lacis wrote, “I have started this and want (actually need) to get it off my desk by the end of this weekend. Dedra was great in reminding me…” Ilze Lacis to Joseph Podach on September 30, 2014, 15 months after the initiation of the BAC inquiry and 44 months after the invoicing deadline.

“Submittal of the BEAR form we missed filing? This too needs to move. The BAC Commission was told this would be complete last June…” Joseph Podach to Ilze Lacis on January 5, 2015, 19 months after the initiation of the BAC inquiry and 48 months after the invoicing deadline.

5.

Segment 3B/4A Summary Assessment

In short, the problems with this FRN are the same as with the others – abdicating the responsibility to separate E-Rate eligible equipment from ineligible equipment to PIA; poor record keeping; and missing deadlines and failing to file for extensions. With so much money at stake, and so much attention having been called to the issue by the BAC and the press, it is absolutely inexplicable why the District allowed so much time to pass without preparing the BEAR form and requesting an invoicing extension.

Although the District has now asked USAC for an invoicing extension, we believe that at this point, the prospect of recovering any money as to this Segment is virtually nil. The FCC in In the Matter of Requests for Waiver or Review of Decisions of the Universal Service Administrator by Hancock County Library System Bay Saint Louis, Mississippi et al. Schools and Libraries Universal Service Support Mechanism, 30 FCC Rcd 4723, 2015 FCC Lexis 1222, May 11, 2015 (“Bay St. Louis Order”), denied requests from multiple school districts for invoice deadline extensions “because the petitioners waited an unreasonable amount of time after the last date to invoice to seek an invoicing deadline extension and have failed to present extraordinary circumstances that would justify the failure to timely submit the invoices.” All of the invoices at issue were more than a year late at the time extensions were sought, and some would have been more than a decade late. And, among the proffered explanations for delay that were rejected in this FCC decision were “employee confusion, lack of understanding of the program rules, or staff turnover…,” – some of the very problems that the District suffered from.

That said, we nonetheless urged the District to file the invoicing extension request – which was finally filed on December 17, 2015 - so as to demonstrate to Cleveland taxpayers that it is doing Squire Patton Boggs

38

everything possible to obtain at least some reimbursement for such a large expenditure, even though it is extremely unlikely that the FCC will approve it.

D.

Segment 4B 1.

Introduction

The three “Segment 4B” schools and corresponding FRNs were George Washington Carver (FRN 2076995); Nathan Hale (FRN 2122420); and Mound (FRN 2112428). The relevant ERate Funding Year was 2010. According to the Certifications of Contract Completion, Zenith completed work on the technology packages for these schools in the September 2011 through March 2012 time period.

As noted earlier, after the government’s corruption investigation became public in 2008, certain employees of Doan bought the assets of the company and formed a new entity, Zenith Systems, LLC. Concern about contracting with Zenith was allayed in this February 2, 2010 email from the District’s outside construction counsel, David Riley, to its then inside general counsel, Stephen DeVita, “I have met with Zenith, Doan and legal counsel….Zenith has purchased the assets of Doan. All of the management of Doan (excepting Michael Forlani) 165 and the workforce of Doan make up the management and workforce of Zenith. Zenith has a multimillion dollar line of credit and appears to be a strong contractor….”

The original total pre-discount amount requested was $899,443, for a funding commitment at 87% of $782,515.41. Ultimately, USAC approved a total commitment of $644, 245.98 at 85%, instead of the 87% originally requested. The original pre-discount amount requested for Carver was $302,867.94; the amount USAC ultimately committed to fund was $217,282.95; but, nothing has been disbursed to date. The original pre-discount amount requested for Hale was $294,733.78; the amount USAC committed to fund was $211,180.51, but, again nothing has been disbursed to date. The original pre-discount amount requested for Mound was $301,841.28; the amount USAC committed to fund was $215,782.42; but, likewise, nothing has been disbursed.

The BAC asked for an explanation as to why the requested and committed funding amounts for this Segment were 40-50% of the comparable per school amounts for Segments 3 and 4A and was told by the CMSD, “Based on construction timelines all eligible items did not get submitted to e-rated (sic) for construction scheduling purposes.”166 The BAC Report noted that the District had persuaded USAC to extend the BEAR submission deadline by three years, from January 28, 2012 to January 28, 2015. Though the District met that deadline, nonetheless USAC initially denied reimbursement because the District did not respond to its notification. The District’s explanation for not responding was that the contact

165

As previously noted, Mr. Forlani was indicted, convicted and imprisoned for criminal activities unrelated to Doan’s participation in the E-Rate Program.

166

BAC Report, p. 3. Though we followed up on this matter in interviews, we still do not understand exactly what was meant by this statement.

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person never received the notification because an out-of-date email had been used.167 The District was granted yet another extension, however, to June 15, 2015.

2.

Pre-Contract

The District’s FCC Form 470 was posted on November 20, 2009.168 There was a bid package of the same date, with one addendum dated December 2, 2009.169 We also found separate bid packages dated November 21, 2008 for Carver170 and Hale171, and dated August 28, 2009 for Mound.172 However, those bids were combined into a single bid package dated November 20, 2009. The “Summary of Work – Technology” for each school included the requirement that “the apparent successful bidder, as notified by the Construction Manager, shall furnish the appropriate E-Rate breakout of applicable devices to the Construction Manager by January 27, 2010.”

A pre-bid meeting date of December 1, 2009 was set by the bid packages, but we found no documentation relating to this meeting.

The bid submission and opening date was December 22, 2009. The sign-in sheet for the meeting173 does not indicate that Joseph Podach, Ilze Lacis, or Anita Spencer were present.

Two technology contractors bid for work on this segment, Zenith, and LOGOS Communications. Zenith submitted its bid evaluation form on January 5, 2010, and there was no reference to E-Rate.174 The scope review meeting was held on January 22, 2010. Ilze Lacis signed the meeting sign-in sheet.175 Attached to the scope review documents were the “Summary of Work-Technology” requirements for E-Rate breakouts, initialed by Zenith, and referencing January 27, the date by which the bid package terms required the bidder to send such E-Rate breakout documents.

167

BAC Report, p. 3.

168

Attachment 2, Segment 4B, Tab 2.

169

Attachment 2, Segment 4B, Tab 1, pp. 1-15. We did not find a copy of the Addendum, but Zenith referred to the date in its completed bid form.

170

Attachment 2, Segment 4B, Tab 1, pp. 25-33.

171

Attachment 2, Segment 4B, Tab 1, pp. 34-42.

172

Attachment 2, Segment 4B, Tab 1, pp. 16-24.

173

Attachment 2, Segment 4B, Tab 4.

174

Attachment 2, Segment 4B, Tab 5.

175

Attachment 2, Segment 4B, Tab 6.

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The summary of findings,176 regarding the two bidders for the combined package, was dated January 25, 2010. Zenith was the lower bidder, $899,443.00 vs. $1,100,000.00. There was no reference to E-Rate therein.

We found no E-Rate breakout documents reflecting submission by the January 27 date, as required by the bid package terms (though we did find such a breakout attached to an April 12, 2010 email from Michael Colosimo to Ilze Lacis and Anita Spencer).177 The District signed the contract with Zenith on February 3, 2010.178 3.

Post-Contract, Pre-USAC Commitment

CMSD submitted its Form 471179 on February 19, 2010, listing Ilze Lacis as the contact person.

The pre-discount funding amount requested was $899,443; with an 87% discount rate the funding commitment request was $782,515.41. These amounts were later adjusted so that the final request was $757,936.45 pre-discount, and $644,245.98 with an 85% discount.

We did not find an Item 21 attachment.

USAC’s Form 471 RAL is dated February 25, 2010.

The CMSD then submitted a Form 471 RAL Response dated March 17, 2010 that changed the discount rate from 87% to 88%, without changing the Funding Commitment Request from the $782,515.41 originally requested (88% of $899,443 is $791,509.84).180 As with the other Segments other than Segment 2, we did not find for this Segment the typical back and forth correspondence between PIA and the District. This dialogue likely would have occurred during the year between the submission of the Form 471 and the Funding Commitment Decision Letter.

4.

Post-Funding Commitment Decision, Including Invoicing And Reimbursement

USAC’s Funding Commitment Decision Letter is dated March 1, 2011181, and it approved $644,245.98 in funding, based on a pre-discount amount of $757,936.45. The total approved funding commitment was at that point based on a shared discount of 85% instead of the 88% discount applied for in the RAL response referred to above. The letter noted that “the dollars requested were reduced to remove” a total of $141,477.02 (pre-discount) in equipment. While

176

Attachment 2, Segment 4B, Tab 7.

177

Attachment 2, Segment 4B, Tab 12.

178

Attachment 2, Segment 4B, Tab 8.

179

Attachment 2, Segment 4B, Tab 9, pp. 1-37.

180

Attachment 2, Segment 4B, Tab 11.

181

Attachment 2, Segment 4B, Tab 14.

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the letter itself does not indicate that the equipment was removed because it was ineligible for reimbursement under the E-Rate Program, the CMSD’s response to the BAC’s questions does so indicate.182 The “Last Allowable Date for Delivery and Installation of Non-Recurring Services” was September 30, 2012.

USAC denied the District’s service implementation extension request by letter dated December 28, 2011, deeming it unnecessary “because you have more than 120 days to implement the services before September 30, 2012.”183 As confirmed by numerous emails, the District failed to timely file an FCC Form 486, informing USAC that services approved for discounts had started and invoicing could begin. Among those emails were these: October 7, 2011 email from Joseph Podach to Dedra Ross, copying Ilze Lacis, “Dedra, I received a phone call this morning from USAC wanting to let us know that we did not respond to their urgent request to submit the Form 486 for: FRN 2112420 (Hale) and 2112428 (Mound).

Each was worth [approximately] $200,000. July 6, 2011. Urgent reminder, we sent no response.

Can still file and can go back 120 days but only a portion of the funding will be allocated and very well might be denied…”

July 13, 2012 email from Ilze Lacis to Joseph Podach and Dedra Ross, “…NOTE! There is a problem with this Form 486 submittal: it was not submitted in time. The Commitment Letter is dated March 1, 2011. This was Anita Spencer’s last week, the height of RFP evaluations, taking on the Procurement area, Dedra’s arrival, other hiring/interview activities, etc. Submitting the 486 slipped through the cracks. The plan: We submit the 486 as quickly as possible. It will be denied because it is outside the window to submit it. I will prepare a waiver request to the FCC (i.e. to wave (sic) the rule) while we wait for the denial letter; then submit the waiver request laying out the situation that caused this unfortunate oversight. While neither I cannot guarantee anything (sic), I can guarantee that I will do everything in my power, so that the District can get its funds. This is the first such instance. I always checked, checked, checked again to make certain of things being done. It was just a difficult time when the FCDL came. Most important is to get this 486 in immediately, so the process can begin.”(emphasis in original).184 August 2, 2012 email from Ilze Lacis to Dennis Kubick, “The answer [to the question of whether the district would receive additional E-Rate money for the new construction schools] is ‘maybe yes.’ The refund would be for the technology implementations at Carver, Hale, and Mound schools. The maximum would be as noted below ($0.644 M). However, past instances point out that not all of the equipment eligible for installations was installed, thus the reimbursement amounts were lower. The ‘maybe yes’ is due to an FCC form I did not send in last year in March when there was so much upheaval with staffing in my and other departments

182

CMSD’s Answers to BAC Queries Regarding Segment 4B, Attachment 8, p. 4.

183

Attachment 2, Segment 4B, Tab 15.

184

For some reason, when the District was asked by the BAC, Ilze Lacis at E-Rate Central drafted a response for the District that said that this Form 486 had been filed by the deadline. CMSD’s Answers to BAC Queries Regarding Segment 4B, Attachment 8, p. 8; Memorandum, dated November 18, 2013, from Ilze Lacis to Joseph Podach, p. 8.

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at CMSD. The form’s filing slipped through the cracks and came to my attention only a couple of weeks ago. I am preparing a waiver for the FCC to waive the time frame rule within which the form should be submitted. There is ample precedent for such oversight.”

September 18, 2012 email from Ilze Lacis to Joseph Podach and others, “ Joe, Attached for your review, approval and signature is a letter petitioning the FCC to waive the filing deadline for the Form 486. You’ll remember that I had not timely filed the 486 for the Carver-Hale-Mound technology implementations. When I discovered the error late this summer, the District submitted the Form 486, which was denied. Thus, we can now submit the petition to waive the rule. There is ample precedent for this, as you will note in the document, and I could say that there is a high degree of probability it will be granted. However, nothing is a done deed (sic) until the USAC letter arrives via US snail mail…”

The District’s letter requesting a waiver was dated September 20, 2012 and signed by Joseph Podach. In explaining why the waiver was sought, Podach wrote in pertinent part, “On March 4, 2011, the one staff member handling E-Rate tasks was dismissed. The new employee for that position joined the District approximately one week later, albeit without any experience or knowledge about the E-Rate program. Concurrently and even prior to March, the executive director who directed the E-Rate program was given expanded responsibilities in addition to those already in the director’s purview. An unexpected medical diagnosis required the executive director to take a month’s leave in late March and April. Furthermore, the E-rate filing for funding year 2011 was on March 17, 2011, days before the medical leave. The changes and actions required by the transformative plans increased operational workload for the director.

Subsequently, the executive director, who had handled the District’s E-Rate funding requests almost from the inception of the program, resigned from the District….”185 The waiver was granted by order of the FCC dated October 17, 2002.

USAC’s Form 486 Notification Letter was dated July 25, 2012, apparently retroactively, adjusting the service start date to March 15, 2012.186 The explanation for the change in the service start date was “120-day 486 deadline,” suggesting that the date was changed to within 120 days of the new service start date based on the FCC waiver that was sought and granted.

The District filed a request on July 4, 2013187 to extend service implementation through September 30, 2014 because the “service provider [was] unable to complete delivery for reasons beyond [the] service provider’s control.” The request does not indicate what current deadline was sought to be extended, but there had been an earlier request to extend the deadline past September 30, 2012.

185

Attachment 2, Segment 4B, Tab 18.

186

Attachment 2, Segment 4B, Tab 16.

187

Attachment 2, Segment 4B, Tab 20.

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On August 21, 2013, USAC granted an extension for service implementation to September 30, 2014, with the last date for invoicing being January 28, 2015.188 The District filed a Form 500 to reflect the change in the contract expiration date to September 30, 2014.189 USAC then sent a November 12, 2013 letter to acknowledge receipt of the form and its processing.190 We found numerous emails indicating a frantic search over a period of years for the necessary invoices so that the BEAR form could be timely filed. For example: September 18, 2012 from Ilze Lacis to Joseph Podach and Dedra Ross, “Is the inventory of the technology equipment that was installed at Carter-Hale-Mound sites in process? You will remember when we met at the very end of July that the game plan was to inventory the equipment at the three sites. This is so that the BEAR form can be submitted to USAC, assuming that the FCC will approve the Form 486 deadline waiver petition. I remember I resent the equipment lists for both the Carter-Hale-Mound sites… We discussed putting on numbered, color-coded stickers for the E-Rate purchases. The equipment that was approved by USAC, and the equipment that was actually installed may have some differences if it follows other such new school implementations in the past. The District must know each and every piece of equipment that was installed and for which equipment the district paid and how much. Frequently, the quantity will vary (up or down) from what was proposed and from what was approved and from what was installed and paid. An audit will do a random pick from the list approved. Thus, the inventory needs to be thorough and precise. The invoices will list the serial numbers, which need to be added to the list…”

December 16, 2014 email from Dedra Ross to Debbie Woods at Zenith, “Thanks Debbie for any support you can provide in locating the equipment detail associated with the following invoices.

I am looking for an itemized list with associated cost the (sic) was given to the school district for payment.”

January 20, 2015 email from Ilze Lacis to Al Bristo at Zenith et al., “ …I am seeking invoices that show the equipment model numbers, quantities, and cost for each piece that were (sic) installed in each of the three schools. Have you found the invoices for the technology installations for Carter, Hale, and Mound new schools? I need the connection of the equipment that was approved by E-Rate, the equipment that was installed and then subsequent payment by the District. There is a list of equipment that was installed at each school, but this does not show that it was invoiced, nor does it have price by item.”

January 20, 2015 email from Ilze Lacis to Marcus Dehler at Zenith, Joseph Podach and Dedra Ross, “…We need an invoice that lists the equipment that was installed with the model number, cost per item, and the quantity installed at X location. This, then, needs to be matched up with the payments that the District made to show that the district had paid the full amount. E-Rate will reimburse the district the discounted portion.”

188

Attachment 2, Segment 4B, Tab 21.

189

Attachment 2, Segment 4B, Tab 22.

190

Attachment 2, Segment 4B, Tab 23.

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The District submitted a BEAR to USAC on January 26, 2015, seeking a total reimbursement amount of $291,133.79. In an email of that same date from Ilze Lacis to Joseph Podach, who was required to sign the BEAR, she reported that USAC had agreed to extend the invoicing deadline to June 15, 2015.

On February 19, 2015, USAC approved no reimbursement, citing “no response from applicant.”191 The District explained to the BAC that the inquiry(ies) had been sent to an “old” email address.192 A new BEAR was submitted on June 10, 2015, requesting $640,342.60.193 E-Rate Central conveyed the following to USAC in connection with the District’s reimbursement request for Carver by email on August 21, 2015, “There was $249,838.40 in work that may have been completed prior to August 1, 2010 (the service start date on the 471).

At this point in time it is unclear how much of the $249,838.40 was completed prior to August 1, 2010. Therefore, out of an abundance of caution we will assume that all of the $249,838.40 was completed prior to August 1, 2010. We will further assume that all of the work was E-Rate eligible. This reduction will decrease the undiscounted amount on line 7392363 from $255,627.00 to $5,788.60. We authorize you to make this adjustment. We do not know the specific installation dates for the various pieces of equipment, but we do know that at least $5,788.60 of E-Rate eligible equipment was installed between August 1, 2010 and April 30, 2012.” 194 On August 28, 2015 USAC denied the BEAR based on “incomplete documents provided for review.”195 The information requested by USAC as a follow up to the BEAR form was filed one day late according to an explanatory email from E-Rate Central on October 19, 2015.196 The District appealed the BEAR denial on October 19, 2015; USAC granted the appeal on December 18, 2015.197 At this point the most that the District can receive in reimbursement would be $427,979.96 and a revised BEAR Form was submitted to USAC on January 14, 2016.

However, the fact that the District cannot verify installation dates for this equipment jeopardizes even that recovery.

5.

Segment 4B Summary Assessment

In sum, the problems with this FRN mirrored those of the others – requesting reimbursement for equipment the District should have known was ineligible under the E-Rate rules; missing

191

Attachment 2, Segment 4B, Tab 26.

192

BAC Report, p. 3.

193

Attachment 2, Segment 4B, Tab 27.

194

Attachment 2, Segment 4B, Tab 28.

195

Attachment 2, Segment 4B, Tab 29.

196

Attachment 2, Segment 4B, Tab 30.

197

Attachment 2, Segment 4B, Tab 31.

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documentation; repeated missed deadlines; and installation of equipment outside the relevant Funding Year.

6.

BRIEF REVIEW OF A FEW FRNS NOT AT ISSUE IN THE BAC REPORT

While the main focus of this report is the FRNs at issue in the BAC Report, our engagement with the CMSD also required us to undertake “a comprehensive review and evaluation of the CSMD processes, procedures and practices otherwise related to the CSMD’s participation in the Program for the Covered Period.” The “Covered Period” is January 1, 2006 to date.

Given the fact the Covered Period spans many FRNs over nearly a decade and that we could not, as a practical matter, continue our work indefinitely, we chose to fulfill this part of our mandate by selecting three additional FRNs to review. The purpose was in part to identify what might have “worked” with respect to those requests for E-Rate support as a way of confirming our conclusions as to the cause of the problems identified by the BAC Report. In addition, we hoped that this additional review would contribute to an overall assessment of the CMSD’s ERate Program and the recommendations that we would make as part of this report.

A.

FRNs Examined

We selected the following three supplemental FRNs: FY 2007 - FRN 1620674/FCC Form 471 No. 584474, which was also a Doan contract for Internal Connections (purchase and installation of core telephone equipment), in which a postdiscount funding commitment of $731,039.73 was approved and 100% of this committed amount was disbursed to Doan by use of the SPI invoicing method, instead of a BEAR.198 In other words, the CMSD paid its discounted portion and Doan invoiced USAC for the nondiscounted portion.

FY 2009 - FRN 1903524/FCC Form 471 693697, which was also a Doan contract for Internal Connections Maintenance (maintenance, repair and upkeep of E-rate eligible technology at 13 locations, including some of the newly-constructed schools), in which a post-discount funding commitment of $1,130,310.59 was approved, yet none of the approved amount was disbursed.199 FY 2010 - FRN 2076817/FCC Form 471 No 768021, which was a contract with SchoolOne.com LLC for Internal Connections (upgrade of older, legacy school core switching equipment at designated District schools), in which a post-discount funding commitment of

198

The ultimate pre-discount amount was $830,726.97 with a discount rate of 88%. The original pre-discount request was for $1,149,799.75. At an 88% discount rate, the original funding commitment request was for $1,011,823.78. However, the FRN was subsequently split, with $92,302.99 pre-discount under contract with Zenith, yielding a post-discount amount under that separate FRN of $81,226.63, which was approved, but never disbursed.

199

The ultimate pre-discount amount was $1,314,314.64 with a discount rate of 86%. The original pre-discount request was for $1,433, 098.92 with a discount rate of 87%. At 87% discount rate the original funding commitment request was for $1,246,796.06.

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$2,708,734.29 was approved, but only $1,495,284.24 was disbursed, again using a SPI instead of a BEAR.200 The CMSD provided documentation for these FRNs from the same sources as we reviewed otherwise. We were also able to segregate from the email database that we had established for the key personnel some 700 messages of potential relevance.201 B.

Findings

In general, we had equal if not more difficulty tracking the E-Rate Program histories of these FRNs than those at issue in the BAC Report FRNs because the E-Rate-related documentation that we were able to find was incomplete.202 We likewise did not find the typical type of back and forth correspondence between the USAC PIA team and the District for these FRNs. Finally, we were unable to find any materials which explained the utilization rates, in particular why there were no disbursements under the Funding Year 2009 contract with Doan for Basic Maintenance of Internal Connections. As a result, our findings, based on these FRNs, are not conclusive. However, we do note the following: Example Of Application Of Internal E-Rate Process Not Applied To BAC Report FRNs The internal E-Rate process drafted by Ilze Lacis was used to award the contract for FRN 2076817. An Evaluation Committee reviewed six respondents to the RFPs that was the basis for the SchoolOne contract.203 The committee reportedly heard in-person presentations from each proposer and then met to review the presentations and complete evaluation forms. An RFP was apparently also used in awarding the Doan Funding Year 2007 FRN contract for telephone equipment in a number of the new schools.

Installation Restricted To The E-Rate Funding Year We noted that the Funding Years 2007 and 2009 Internal Connections contracts with Doan and SchoolOne appropriately limited installation of the E-Rate equipment to the relevant E-Rate Funding Year, subject to any extensions that USAC might authorize. This avoided USAC’s denial of funding for installation outside the Funding Year, which prompted partial reimbursement denials in Segments 2 and 4B.

200

The ultimate pre-discount amount was $3,043,521.67 with a discount rate of 89%. The original pre-discount request was for $2,440,130.50 with a discount rate of 90%, which yielded a funding commitment request of $2,196,117.45. The Funding Commitment Decision Letter notes that this increase was to “agree with applicant documentation.”

201

Furthermore, we did not re-interview with respect to these FRNs any of the people previously interviewed regarding the FRNs related to the Segments.

202

For example, we found no Funding Commitment Decision Letter for the Funding Year 2007 FRN. We found no copies of bids, reflecting presumably that they were stored elsewhere as in the case of the bids on the Segments.

203

Memorandum, dated January 27, 2010, from Ilze Lacis, Director MIS to Joseph Podach, Deputy Chief Operations & Improvement, RE: Evaluation Results for RFP#20836-E-Rate RFPs#12-1011 (School Core Switch).

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Service Substitutions Timely Employed The District timely made and received USAC approvals for service substitutions in connection with the Funding Year 2007 and FY 2010 contracts.204 Unlike the situation with the Segments, there was presumably greater coordination between Doan and the District in the case of the Funding Year 2007 FRN so that if differing equipment was desired and installed the substitutions were approved in advance by USAC.205 Access To Invoices Invoices for at least one of these FRNs were included in the E-Rate File Room materials.

Specifically, for the Funding Year 2007 FRN, we reviewed the invoices from Doan to the District totaling $731,039.73, reflecting the District’s 12% share of the costs, with a specific breakout of the E-Rate eligible portion.

Tracking Installed Equipment It is unclear whether the District had a regular program for tracking and managing the location of E-Rate funded equipment that had been installed in schools, in case of any audits. It was noted in an email from Ilze Lacis to Kent Stanko, a CMSD Data Center Engineer, that “[a]sset management under E-rate is serious business. The funding is given for a specific location in a specific year for a specific piece of equipment.” 206 Yet an email from Mr. Stanko to Glenn Popil the next day reflects that CMSD Network and Asset Management personnel could not obtain information about what equipment had been purchased through E-Rate so it could in fact be tracked.207 Inability To Justify Discount Rate As with the FRNs at issue in the BAC Report, the District likewise had difficulty justifying the discount rate with regard to these FRNs. The discount rate for the Funding Year 2007 FRN was reduced, albeit by only 1%. The same 1% reduction was imposed in connection with the Funding Year 2009 FRN. In that case, USAC provided a lengthy list of schools, including a

204

Administrator’s Decisions On Service Substitution Request, January 21, 2009 and June 19, 2012.

205

Interestingly, the E-Rate invoices on this contract for Internal Connections were through SPI forms because the telephone equipment involved was procured outside of the technology packages subject to the OSFC bidding process.

206

Email, dated July 17, 2014, from Ilze Lacis to Kent Stanko.

207

Email, dated July, 18, 2014, from Kent Stanko to Glenn Popil, “Glenn, Just so you know, I have asked for this information from Dedra before and she never responded. Also, Dan and I are thinking it would be a very good idea for Network and CMSD Asset Management to know what equipment has been purchased through eRate.

There seems to be a disconnect with this information and I just want to make sure that both areas are aware, so we don’t break any rules.”

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number of the Segment schools, noting that the supporting third party documentation did not justify the 90% sought.208 Inclusion Of Ineligible Equipment Or Services Even for schools other than those in the Segments, USAC reduced funding because of the inclusion of ineligible equipment or services. For example, the Funding Commitment Decision Letter for the FY 2009 FRN reduced the “dollars requested…to remove the ineligible product(s)/service(s): $9,794.17/month and LCD Monitor mounting plate for $104.52/month.”209 Document Retention As noted above, we did not find all of the categories of documents required to be retained under the FCC’s E-Rate document retention rules.210 For these FRNs, the relevant documents would have been required to be retained for five years after the last date on which E-Rate supported service was rendered.211 We were given no indication that documents had been purged based on the expiration of the five-year period.

7.

CONCLUSION

Having listed in the Executive Summary the overall factors that led to the District’s failure to obtain reimbursement for all of its E-Rate eligible expenditures, and having then given a detailed, step-by-step explanation of “what went wrong” with each of the Segments, we here attempt to assign responsibility.

The fact of the matter is that the District had a dedicated E-Rate team – initially Ilze Lacis and her assistant, Anita Spencer, under the supervision of Joseph Podach – who ultimately were responsible for ensuring that all E-Rate Program requirements were met, and met in a timely fashion. Moreover, unlike the case with some districts, the CMSD also had access to the

208

For example, USAC reduced the discount percentages claimed at George Washington Carver from 90% to 80%, at Harvey Rice from 90% to 60%, and at Wade Park from 90% to 50% because the “documentation provided does not support the requested discounts” for those entities. Email, dated April 19, 2011, from Son Luu, PIA Reviewer, Schools and Libraries Division, Program Integrity Assurance, to Ilze Lacis. Note, we did not have underlying materials submitted by the CMSD or the District’s response to this message. As noted, USAC made an overall 1% reduction.

209

Funding Commitment Decision Letter, dated March 9, 2010, from USAC Schools and Libraries Division to Ilze Lacis, RE: Form 471 Application Number: 693697.

210

Some of the information apparently retained under these FRNs in the CMSD E-Rate File Room included invoices related to FRNs from prior funding years, which we presume were misfiled.

211

See, Fifth R&O, supra.

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services of an expert outside consultant – E-Rate Central – that the District had used in varying degrees going back to FY 2003.212 In our view, primary responsibility for the most costly failure – the failure to timely file even a request to extend the deadline by which to invoice USAC for the $5.82 million CMSD paid to install technology equipment in the Segment 3B/4A schools - lies squarely with Ms. Lacis.213 As noted earlier in this report, even before USAC had formally approved this funding commitment she assured Mr. Podach that “invoice submittal should flow better for this round” because the District could submit the “invoices by site and received reimbursement by site.”214 Three months later, Ms. Lacis again committed “to work with Doan Pyramid/Zenith Systems re the invoicing.”215 It was not until 42 months later, after Ms. Lacis had left the District and 30 months after the January 2011 invoicing deadline, that she discovered, now as the District’s ERate consultant, that no invoice extension request or other filing was ever made.216 It is simply inexplicable why Ms. Lacis, over the course of the many months before this discovery was made, would not have asked Ms. Spencer (or someone else in the know at the CSMD) about the status of the matter. Moreover, prior to her departure for E-Rate Central, we would expect that someone of her professed diligence217 would have either seen to it that the invoices were compiled so that reimbursement could be sought or filed for an extension, given the large amount of money at stake. Yet we found no indication that she ever did so. 218 While it is true that she was burdened with additional responsibilities as Executive Director – Procurement around the time of the January 2011 invoice deadline, and she was no doubt distracted by the upheaval caused by the staffing shakeup, these circumstances provide no

212

Ms. Lacis resigned in November 2011 to join E-Rate Central, which she has recently left. Ms. Spencer was succeeded by Dedra Ross in March of 2011.

213

Ms. Lacis was responsible for other missed deadlines (e.g., failure to file Form 486 for Segment 4B) which did not ultimately have a monetary impact. Although she said that she relied on Anita Spencer to keep her alerted regarding deadlines Ms. Lacis, should have put in place a formal system for tracking E-Rate deadlines. She admitted there was none. Ms. Spencer said that she had her own “tickler” system. We found no such system.

214

Email, dated November 11, 2009, from Ilze Lacis to Joseph Podach.

215

Email, dated March 8, 2010, from Ilze Lacis to Joseph Podach

216

Email, dated September 10, 2013 from Ilze Lacis to Joseph Podach, “…[N]o BEAR was timely filed. I have no explanation for you, other than I do remember saying to Anita [Spencer] that we must file that form….”

217

See Email, dated July 13, 2012, from Ilze Lacis to Joseph Podach and Dedra Ross and others, “I always checked, checked, checked again to make certain of things being done.”

218

Indeed, we reviewed a report that she prepared in July of 2012 for Mr. Podach on “’live’ past years’ funding, which did not include any mention of the Funding Year 2008 FRN, although it included the as yet outstanding Funding Year 2010 FRNs for Mound, Carter and Hale. Email, dated July 10, 2012, from Ilze Lacis to Joseph Podach. At that point she had either concluded it was no longer “live” because the invoicing date was long past or, more likely, it still was off her radar screen.

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excuse or justification for her failure to follow up on the status of this very sizable potential reimbursement.219 In our view, Mr. Podach, to whom she reported, also bears some responsibility, in his case for not being aggressive enough in ensuring that all necessary steps were taken by those he supervised. The BAC was told that the process of compiling the necessary invoices for the Segment 3B/4A reimbursement would be started by June of 2014 (which, of course, was already three and a half years after the deadline). When Mr. Podach left CMSD in April of 2015, the task had yet to be started.

To the extent that, in Segments 2 and 4B, eligible equipment was installed outside the E-Rate specified time frame, Mr. Podach, either directly or through CMSD Capital Projects’ head Gary Sautter220, was in a position to address this issue with the construction manager, OHGR. Specifically, he could have pressed OHGR to coordinate, to the extent possible, the installation schedule with the E-Rate timeline, and he could have worked in tandem with the E-Rate Office, OHGR, and Doan/Zenith to ensure that any technology equipment installed that was different from that on the USAC-approved list was likewise eligible for E-Rate funding.

Another problem that affected all the Segments is that Ms. Lacis largely left it to USAC to determine what technology equipment was reimbursable under E-Rate rules, even though in some cases the ineligibility of the equipment ought to have been obvious. By way of contrast, the guidelines that she herself created for schools outside the Segments specifically required the E-Rate office to separate out E-Rate ineligible equipment before submitting funding applications to USAC. Not only was leaving the task of separating out E-Rate ineligible equipment largely to USAC an abdication of the CMSD’s (and, specifically, Ms. Lacis’) responsibility, it also confused and misled the BAC, leading it to wonder why the CMSD was not getting all of the funding it initially had requested. In the case of Segment 3A, at least in part on account of equipment deemed to be ineligible for reimbursement, USAC agreed to fund less than a third ($839,000) of the amount originally approved ($3.18 million).

Additionally, it should have been apparent to both Mr. Podach and Ms. Lacis from the months it took to try to obtain detailed invoices from Doan and others for the equipment actually installed in the Segment 2 schools and to match that equipment list with the equipment list that was the

219

We note that the FCC has said that employee confusion, lack of understanding of the program rules, and staff turnover do not constitute “extraordinary circumstances” justifying an invoicing extension request at this late date. See Bay St. Louis Order, supra, ¶9.

220

We found emails indicating that Mr. Sautter was at least “put on notice” that, to ensure reimbursement, approved equipment had to be installed within the E-Rate specified time frame. See the email cited in footnote 63 in which Mr. Sautter was copied, relating to Segment 4B installation. He was also put on notice that equipment substitutions had to be approved by USAC before installation to ensure E-Rate reimbursement. Email, dated November 5, 2009, from Ilze Lacis to Gary Sautter, “…we are at the tail end of reconciling the E-Rate approved list of equipment with the invoiced/paid list of equipment. There are minor discrepancies between the original equipment list and the items installed, e.g., quantities, exclusions, different model. When we complete the initial invoicing, I will see if we can legitimately recoup some of the remaining funds via equipment substitution. This may be problematic as it is after the fact;” Email, dated February 17, 2009, from Ilze Lacis to Joseph Podach (on which Mr. Sautter was copied), “Equipment substitutions: an absolute must, if we want to erate the equipment you plan to substitute. Please keep me closely in the loop on this one. E-Rate will not pay on any equipment unless it’s on their approved list. I would need the ‘from’ this equipment ‘to’ this equipment list….”

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basis for USAC’s funding commitment that a requirement should have been imposed on Doan to provide such invoices and to match the two lists (allowing for any E-Rate eligible equipment substitutions) as a condition to payment for Doan’s work in Segments 3 and 4. But, as near as we can tell, neither took any action to see to it that such a requirement was imposed.

As noted in the Executive Summary and Segment chapters, there were other problems that resulted in Cleveland’s taxpayers ultimately getting reimbursed for only a fraction of the amount they spent for technology equipment in the schools at issue in the BAC Report– among them, missing documentation, and ignorance of or confusion about the discount rate that the District was entitled to. All of the problems were attributable, in whole or in large part, to the failure of the District’s E-Rate staff to carry out its responsibility, namely, timely complying with the ERate Program rules so as to maximize receipt of reimbursements from USAC. Additionally, some blame should fall on E-Rate Central, the District’s outside consultant. For one thing, when Ms. Lacis resigned from the District, the District specifically chose to contract with E-Rate Central because of its widely recognized expertise and its intimate familiarity with the District from previous engagements. And, for more than three years, Ms. Lacis appears to have been the primary point person at E-Rate Central for CMSD matters. Yet, in spite of this, with more than $5 million at stake and several inquiries of Ms. Lacis by Mr. Podach, no BEAR form was prepared or filed, nor extension requested, for Segment 3B/4A. As for Segment 4B, even after the District was under the proverbial microscope for, among other things, a series of missed deadlines over the course of the Segment 2-4 school construction program, E-Rate Central missed by one day the deadline for providing additional documentation USAC requested in connection with its consideration of the District’s BEAR form. Although E-Rate Central successfully appealed this rejection, still, the point of engaging a consultant, an unaffordable luxury for many school districts, is, among other things, to ensure timely compliance with USAC deadlines, not to rely upon the prospect of successful appeals when failing to do so.

8.

RECOMMENDATIONS

The District asked us to make recommendations as to how, going forward, it might avoid the mistakes of the past in its efforts to obtain E-Rate funding. We believe that there are a number of steps the District should take, as outlined below.

A.

Future New School Construction Projects: Lessons To Be Learned

We were told by the CMSD’s current CIO that the District might seek E-Rate Program funding for certain technology components in connection with Segment 7 new school construction. If so, the CMSD should avoid the problems that lay at the heart of the funding outcomes detailed above in the analyses of the various Segments. For one thing, there should be regular interaction between the E-Rate Office (and any outside E-Rate consultants) and the technology contractor, at the front end of and throughout the process and not just the back end. This interaction could include: (a) reviewing the technology contractor’s E-Rate breakout lists in detail for ineligible equipment before submitting those lists to USAC to apply for E-Rate funding; (b) requiring pre-payment review by the District’s E-Rate Office of technology contractor invoices to ensure that they include the level of detail required for E-Rate reimbursement by USAC and that the invoiced equipment, subject to permissible service substitutions, matches the original equipment lists as approved by USAC in making its the funding commitment; and (c) coordination of schedules to ensure that equipment approved for Squire Patton Boggs

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E-Rate reimbursement is installed within E-Rate timelines and the District can verify those dates.

B.

Formulate And Implement Sound Internal E-Rate Program Procedures

As noted elsewhere, we have seen a draft manual and flow chart provided by the CIO on internal E-Rate processes, and the CIO tells us that it is being followed. The manual should be reviewed by the CMSD’s current E-Rate consultant and then should be formally approved by the CEO, with copies provided to all involved in any aspect of the E-Rate Program process.

Follow up training sessions would be advisable as well. To the extent feasible, these requirements should be incorporated into contracts with vendors, including those involved in school construction projects. The procedures should address at least the following: REQUIRE REGULAR COMMUNICATION AMONG ALL PARTICIPANTS IN THE ERATE PROCESS – Part of the reason the District received only a fraction of the E-Rate funding it was initially approved for was the lack of regularized communications between and among the construction manager, the technology designer, the technology contractor, and those at the District responsible for obtaining E-rate funding. Such communications should be incorporated into the E-Rate process across all E-Rate Program-supported products and services.

DEVELOP AND IMPLEMENTING A RIGOROUS PROCESS FOR TRACKING ERATE DEADLINES – We noted in our analysis a number of incidences of missed deadlines.

We were told about, but found no evidence of, a “tickler system” that was to ensure timely filings with USAC. Such a system should be established, adhered to, and when deadlines are missed that result in the District’s losing money, there should be some kind of individual accountability (e.g., a factor to be considered in performance evaluations, for example).

E-RATE DOCUMENT RETENTION SYSTEM – In 2012, the CMSD was advised with respect to retaining E-Rate Program documents that the “[b]ottom line is keep everything” (emphasis in original).221 As previously noted, the FCC’s rules require retention of “all documents related to the application for, receipt, and delivery of supported services….” 222 This includes emails with USAC and service providers concerning E-Rate applications and services.

Under current rules, the documentation must be retained for at least ten years after the latter of the last day of the applicable funding year or the service delivery deadline for the request (including any extensions). Based on our review of the documentation supporting the Segments, the CMSD should establish a system whereby such documentation is compiled, organized, and then retained in one place, so that in the event of a request for it by USAC or a third-party auditor it can be readily accessed. Failure to produce required documentation can result in USAC’s seeking recovery of funds. Whatever the District’s own document retention period may be, at least for documents related to E-Rate, USAC’s documentation retention rules should control.

221

Email from Ilze Lacis to Joseph Podach, dated July 11, 2012.

222

47 C.F.R. §54.516(a); see http://www.usac.org/sl/tools/document-retention.aspx (“All applicants and service providers are required to retain receipt and delivery records relating to pre-bidding, bidding, contracts, application process, invoices, provision of services, and other matters relating to the administration of universal service….”).

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USE BILLED ENTITY REIMBURSEMENT FORMS ONLY WHEN THE ADVANTAGES OUTWEIGH THE DISADVANTAGES, AND THEN, WITH CAUTION – We explain above that the District reaped an additional financial benefit from using BEARs as the invoicing method for the schools at issue in the BAC Report. But, the use of BEARs required the District to put an even bigger premium on ensuring that technology vendor invoices were in compliance with E-Rate Program rules because the District had to pay all such vendor costs up front and seek USAC reimbursement later. And, because BEARs allowed the District to pocket the E-Rate funding on top of what the OSFC program provided in State funding, when problems arose with BEAR invoicing there was ultimately a more relaxed attitude about going all out to comply with E-Rate Program rules. So, the pros and cons of using BEARs should be weighed carefully, and, when BEARs are chosen as the invoicing method, this should be done with due caution.

ADDRESS DISCOUNT CALCULATION/VALIDATION PROCESS – We came across a number of instances where USAC was “not able to validate [the] requested discount percentage” for various schools. Internal procedures should specify who is responsible for timely gathering data and ensuring its completeness, accuracy, and compliance with USAC requirements, so as to be able to avoid USAC inquiries altogether or promptly provide responses that will justify the maximum discount rates to which the District may be entitled.

ASSESS HOW TO MAXIMIZE UTILIZATION RATE – As we noted above the CMSD’s percentage utilization of the E-Rate funds ultimately committed by USAC has trailed the nationwide average during the period for which we had information. Utilization rates of less than 100% can be explained by a number of factors such has high estimates, projects that do not go forward for a number of reasons or, even in some cases, because the requisite invoices are not submitted. While it was not within the scope of our engagement to analyze this matter, the CMSD should take all reasonable steps to maximize receipt of the funds committed by USAC. C.

Attend USAC E-Rate Training And Otherwise Devote Necessary Time And Resources To Understand The E-Rate Program

Each year USAC holds multiple, one-day E-Rate training sessions for applicants around the country.223 The leadership of the USAC’s Schools and Libraries Division discuss various aspects of E-Rate program requirements and compliance, including any updates. The CMSD ERate personnel should attend one of these sessions annually. If this is not possible for some reason, the District should at least ensure that such personnel review the online materials that are made available. There are also periodic webinars where there are opportunities to pose questions to USAC personnel involved in invoicing, eligible services determinations, and other matters.

The fact that the CMSD is employing an expert consultant does not mean that the District’s internal personnel should forego such educational opportunities, if only to be able to fully understand and evaluate the consultant’s guidance and recommendations. Furthermore, reliance on a consultant’s guidance is generally not a defense to findings of non-compliance with the ERate rules.

223

In 2015 there were eight applicant training sessions. Videos of the sessions and related training materials are available online. See http://www.usac.org/sl/about/outreach/

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9.

ACKNOWLEDGEMENTS

We are grateful to each of the interviewees for making time to speak to us, even though we made it clear to them that they were under no legal obligation to do so. Their cooperation was essential to our understanding and determination of key facts and circumstances. We also express special thanks to the District's James Mix, the District’s Manager of Public Records Requests, Student Records and Paralegal Services in the Legal Department, for going above and beyond the proverbial call of duty by spending many hours in assisting us in obtaining access to key documents, files, and certain interviewees.

10.

AUTHOR BIOGRAPHIES

Clark K. Ervin is a partner in the Government Investigations/White Collar Practice Group of Squire Patton Boggs (US) LLP based in the Washington, D.C. office. He served as the Inspector General of the United States Department of State; the very first Inspector General of the United States Department of Homeland Security; and a Deputy Attorney General of Texas.

His principal area of practice is representing companies and individuals being investigated by Inspectors General; the Justice Department and other Executive Branch agencies; the Congress; and/or State Attorneys General, as well as conducting internal investigations for public and private sector bodies. He is a cum laude graduate of Harvard College (A.B. 1980) and Harvard Law School (J.D. 1985), and was a Rhodes Scholar at Oxford University (M.A. 1982).

Paul C. Besozzi is a partner in the Communications Practice Group of Squire Patton Boggs (US) LLP based in the Washington D.C. office. Among his areas of expertise, since 2003 he has advised and represented participants in the E-Rate Program, including beneficiaries, service providers, as well as consultants, on Program rules and procedures, audits, investigations, compliance reviews, commitment adjustments, rulemakings and appeals before USAC and the FCC. He is a graduate of Georgetown University (B.S. cum laude 1969), the Georgetown University Law Center (J.D. 1972), and the George Washington University (M.B.A. 1977), both in Washington D.C.

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