The Risks that Threaten the Sustainability of the Universal Service Fund

January 10, 2023 | The Universal Service Fund — the program that provides subsidy dollars for essential voice and, increasingly, broadband services — is a bedrock of U.S. Telecom policy. The roughly $10B in annual subsidies supports high-cost areas, low income families and schools and libraries as they connect their constituents to the digital world.

But the Fund is also facing ever-increasing pressure from outside influences that threaten its sustainability. Three separate sets of risks could undermine the fundamental functioning of the fund, and any one of them could throw it into a state of uncertainty and chaos, which would create challenges for Congress, the FCC, the fund’s recipients and providers who assess services to fund the Program.

The first challenge is the broken contribution method. The program is funded by an assessment on the voice portion of telecom bills. When the fund was originated, this assessment was in the low single digits. As demand for broadband rose — and voice services eroded — the assessment factor rose precipitously. The current factor is 33%, and that does not include all the subsidy dollars currently supporting broadband thru the new Affordable Connectivity Program. The high factor in turn puts pressure on the assessed voice products, causing continuous erosion of the base.

There is now broad consensus that this assessment method is broken, but little agreement on how to fix it. Options include assessing broadband services, requiring the edge companies that profit from broadband connectivity to contribute to the fund or funding the Program through direct Congressional appropriations. But the politics on all of these options are fractured, making legislative or regulatory reform challenging.

The second challenge emerges as a result of the pandemic-era funding that Congress appropriated directly for broadband support. As part of the Jobs Act, Congress directed $14B in funding to support connecting low income families to broadband services. That program currently supports over 15M households, a number that is likely to grow. But as the number grows, the $14B fund continues to be depleted. At current spending, the fund could be fully expended as early as late this year but certainly next. At that point, Congress and the FCC will face the difficult choice of disconnecting the millions of low income households served by the Program, appropriating additional dollars to keep the program functioning, or attempting to support those households through the current USF funding mechanism, which could pressure the existing program to the point of breaking.

The final challenge arises in the form of a lawsuit pending before the 5th Circuit that calls into question the legality of the Program itself and challenges the fact that the FCC has delegated authority for administering the fund to USAC, a non-profit entity created in 1998 to support fund administration.

Plaintiffs claim that the Program is an “unconstitutional tax” raised and spent by “an unaccountable federal agency,” which in turn has “delegated almost all authority over this revenue-raising scheme to a private company [USAC].” They have argued that the Program should be funded through direct Congressional appropriations as opposed to the current service assessment approach.

The FCC has countered by arguing that the delegation of authority over the Program by Congress to the FCC is consistent with constitutional precedent, and that it is entirely permissible for the FCC to rely on USAC to administer the program, as USAC is subordinate to the policy-making authority of the FCC and engages in only ministerial tasks. This position has been broadly supported by Congressional, industry and consumer advocate stakeholders. But the case is pending before a Circuit Court which previously found unconstitutional the manner in which the Consumer Financial Protection Bureau was formed because it received funding through the Federal Reserve as opposed to through direct appropriations channels.

If a Court did decide that the USF funding mechanism was unlawful, the Fund and its future would be thrown its chaos. Absent reliance on telephone bill assessments, the onus would fall on Congress to devise an alternative funding approach, and given the deep divide that has persisted on this issue for decades, it seems unlikely that Congress could act quickly or decisively to address any funding shortfall.

Given the range of risks the Fund faces, it is past time to essentially rethink universal service funding in this country. One approach that merits further discussion comes from the NUL’s Lewis Latimer Plan for Digital Equity and Inclusion. To address affordability challenges, the plan proposed two new subsidized services — LifelineJobs and LifelineMed — that would be funded through mandates added to existing government unemployment and medical insurance programs, like Medicaid. Beneficiaries of these programs would receive support for a broadband service as part of their benefit. If properly designed, the Plan argues that these services would largely pay for themselves in the form of savings in the delivery of critical unemployment and healthcare services. This proposal could go a long to way to putting universal service goals on sound footing well into the future.

Broadband service is essential for the digital age. It’s time to reform the universal service funding mechanisms to ensure the continuity and sustainability of the USF Program and its support for broadband services going forward.

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