20 Reasons Why the Universal Service Fund is an Out of Control Slush Fund:

And What we Should Do About it.


The Universal Service Fund should not be increased. It should be reduced and/or removed from customers bills.

  • Broadband should not be added to the Universal Service Fund. Instead, the states need to get back the billions of dollars per state that was already collected in excess local rates and tax perks to rewire their states and even pay for schools and libraries to be upgraded..
  • The High Cost fund should become ‘needs' based and not given to wealthy companies in non-high-cost areas.
  • Lifeline should be increased to make sure that every low income family is protected from losing their phone service.
  • Funding Schools and libraries should be re-evaluated as most of these areas have already been wired,
  • Investigations  should start to examine identical ‘state-USF funding’, from Lifeline or schools and libraries or even high costs.
  • The entire phone bill should be audited with ALL charges accounted for before any increases.

Definition: The Universal Service Fund is a tax applied to all interstate (long distance and international) communications – To date, it is 11.4% added to your bills.  It’s also added on anything considered interstate, including the local FCC Line Charge, Number Portability and other areas.


FCC’s Universal Service homepage:


Quarterly percentage charged to customers (contribution factor)


According to the FCC, the goals of Universal Service, as mandated by the 1996 Act, are to:

  • Promote the availability of quality services at just, reasonable and affordable rates for all consumers
  • Increase nationwide access to advanced telecommunications services
  • Advance the availability of such services to all consumers, including those in low income, rural, insular, and high cost areas at rates that are reasonably comparable to those charged in urban areas
  • Increase access to telecommunications and advanced services in schools, libraries and rural health care facilities
  • Provide equitable and non-discriminatory contributions from all providers of telecommunications services to the fund supporting universal service programs

Sounds great, until government agencies who are more influenced by the phone companies than the public interest run the fund.


Let’s go through the basic points.


1) Massive increase to corporate subsidies and taxes.   The USF fund in 1999 charged  3.9%, in 2008 (second quarter) the amount is now 11.4%. --- a 192% increase.


2) The total amount of money went from $4.7 billion in 2001 to $6.95 by 2007  --- a 50% overall increase.


3) Who pays the USF Fees? Everyone, including seniors, low income families, businesses, etc.  Why should people who are already having trouble paying their rising costs of service have to pay into a fund that is out of control?


4) Who gets the money? – Wealthy phone companies without audits or need.  This chart is the basics   62%, the largest part of the fee, DOES NOT got to wire schools and libraries, but goes to something called a “High Cost Fund”.


Universal Service Fund, 2007

(in the billions.)


High Cost:      



Low Income:  



Rural Health Care:



Schools & Libraries



Estimated 2007 Support




5) Why Is It a Slush Fund? Because In Most States There Are No High Cost Areas.

There are 4 reasons we can say this:


6) States ‘Average’ All Local Service Costs


 In virtually every state, the cost of service has been historically averaged out throughout the entire state, sometimes done by regions. Urban areas actually pay more to support rural areas. This has always been in affect. Therefore, there are no high cost areas as they are funded through ALL local rates.

7) Outrageous Payments Per Line.

The FCC's High Cost fund is so out of whack that it gives thousands of dollars in subsidies per single-line to some telephone companies. For example, the small Border to Border telephone company in 2004 received $3,926 per line for High Cost subsidies. This doesn't include the money the company gets from the subscriber for local service and other fees.

June 2006


8) No Regulator Examines the Costs and Profits.


That’s right, in most states, the cost of the service is now divorced from the actual price a customer pays, and since the 1990’s, the profits from the local service more than doubled – from 12% to 29% (1984-2004).


With no regulator examining the profits, how can you have high costs? You can’t.  It is voodoo statistics at its finest with no regulatory oversight in most states.


9) The Costs to Offer Service Continues to Decrease, Yet the Regulators Continue to Allow Increases to the Costs of Local Service.


If someone was actually examining the profits they would find that these companies don’t need the money to make them ‘profitable’.  Local service never lost money because when the company’s profits dipped, they can simply go back to the regulators for rate increases. Moreover, since 1984 there has been a 65% drop in employees, a 60% drop in construction as compared to revenues, and the companies increased their write-offs of the networks – thus saving on taxes.


And, as we have documented, virtually every state has had major rate increases on virtually all services.

  • In New Jersey and New York, there have been and continue to be increases to rates. New Jersey is expecting an 80% increase, while virtually every charge, from directory assistance to inside wiring continues to have massive increases.

Since local rates in non-high costs areas continues to rise, even though the costs to offer this services continues to decrease, then why aren’t low cost areas getting a ‘refund tax’ to compensate everyone for their contribution to paying for high cost areas?


10) Massive Cross-Subsidization of Local Rates with Everything Else. 


In  many states, it is clear that the ‘high-cost’ funding is not going to pay for local service provisioning but everything else, from long distance to DSL (broadband). Why should companies be allowed to charge customers for ‘interstate information services’ with local phone rates? How does that help customers buying local service? How does that help the utility customers?


In fact, Verizon and AT&T are using their funding for local phone service wiring and diverting it to pay for their other projects, like FiOS or U-Verse. Thus, the actual costs of offering service continues to fall as the networks aren’t being upgraded.


Other Universal Problems:


11) Lifeline is Out of Service.

Only 12% of the money from the Universal Service fund actually goes to pay for low income families, but that’s not the kicker, In examining those who are getting USF lifeline support, it is clear that a) the phone companies get reimbursed full RETAIL rates for the services they provide and b) USF payments to customers do not cover the basic use of the local phone service so Lifeline customers can pay an additional 50-100% more when the actually use the phone or get normal customer services. Also, you have to be below the poverty level to get any assistance, yet the companies do not have to prove they need the money.


According to AARP only 30% of residential customers who could receive Lifeline are getting the service. 


12) Telephone Companies are the Largest Recipient of the School and Libraries Fund. The largest recipient of the schools and libraries funds are the phone companies that get reimbursed full business rates for any discounts these public organizations get. Since they have a monopoly on services, they get most of the funding. If America is buying billions of dollars of service, you would think that there would be a ‘discounted-rate for schools and libraries’, especially when they’re the most/only viable provider.


13) Didn’t We already Pay for broadband and the Wiring? Why Charge Us Again?

From Ohio to New Jersey, built into the cost of service has been an essentially “defacto” tax that is being paid through local phone rates and other charges to fund broadband upgrades, as well as wiring of schools and libraries. So, by adding ‘broadband’ to the Universal Service mix, all the regulators are doing is increasing how many times we can screw the customers and make them pay over and over for services they never got. 

14) The FCC  Misleads the Public about USF Funding. The FCC claims that the phone companies pay Universal Service: Who Pays for Universal Service? ---All telecommunications service providers and certain other providers of telecommunications must contribute to the federal USF”. And it adds that the companies don’t have to charge customers --- “The FCC does not require this charge to be passed on to customers. Each company makes a business decision about whether and how to assess charges to recover its Universal Service costs.” Misleading garbage. Customers pay the USF as a pass-through, not the telcos, and it is almost always at the full rate. – or more.

But it gets worse because there is no “Understandable English” explaination to the public about how they are getting screwed. A simple example:


 In a companion Public Notice, released May 1, 2007, the Joint Board sought comment on various proposals to reform the high-cost universal service support mechanisms. Specifically the Joint Board sought comment on the following issues and proposals: 1) the use of reverse auctions to determine high-cost universal service support; 2) the use of GIS technology and network cost modeling to better calculate and target support at more granular levels; 3) disaggregation of support; 4) the methodology for calculating support for competitive ETCs; and 5) whether universal service funding should be used to promote broadband deployment.”

No human could understand the convoluted discussions at the FCC and even be able to get a simple explanation of this “public Notice”—It is clear the Public is not invited nor has the expertise of advanced regulatory, legal, much less mathematical knowledge. We believe this information is targeted so the public won’t know just how badly we are being played.

However, the decisions being made will raise rates, could harm competition, could add ‘broadband to the costs of service’ and no one is going to know how it happened.

15) Out of Control Without Adequate Audits.

In the 2007 Report on the USF, the FCC’s Inspector General made the following statement: "The audits resulted in the following erroneous payments rates: Contributors’ payments - 5.5% estimated to be ap­proximately $385, 000,000), Low Income - 9.5% estimated to be ap­proximately $75, 500,000); Schools and Libraries - 12.9% (estimated  to be approximately $210,000,000); High Cost Fund - 16.6% (estimated to be approximately $618,000,000); and Rural Health Care - 20.6% (estimated to be approximately $4,450,000).


This comes to $1.293 billion dollars and these are estimates as they are based on a sample, not actual monies being refunded. The Improper Payments Information Act of 2002 (“IPIA”) claims that a program is at risk if it has 2.5% or $10 million. --- these 5 areas are 2500% above ‘at risk’.

Conclusion Points:

The largest cheerleaders for the Universal Service has been the Senate under Stevens and Inouye. They represent Alaska and Hawaii, respectively, some of the largest recipients to the fund. here are also others, like the FCC, that want to increase the USF and have it pay for broadband.


What Should Happen next


16) A "Needs' Test". - If the companies are losing money after everything else has paid their fare share, then, and only then, should these companies get the government’s help-- read our money.


17) Do not add another cent to USF until the FCC investigates ALL of the cross-subsidies, all of the extra charges for schools and libraries by state and ALL of the monies collected to pay for broadband.


18) Make the payments to the customers. Right now the phone companies control every aspect of USF. If there is a payment to be made, the customer should choose who gets the money, not hard-wired to the incumbents.


19) When someone asks if we should add broadband to this USF say “Pay for Broadband: What are you,  nuts? Stop taxing  us again and again.”


20)Demand a clear, concise, English analysis for the public, not gobblygook for the political savvy wonks.



Bruce Kushnick, Teletruth

Tom Allibone, Teletruth.