Commissioner Pai Remarks at Citizens Against Government Waste B/fast
REMARKS OF FCC COMMISSIONER AJIT PAI
AT THE CITIZENS AGAINST GOVERNMENT WASTE POLICY BREAKFAST
JULY 28, 2014
In 1982, President Reagan challenged the President’s Private Sector Survey on Cost
Control, better known as the Grace Commission, to “work like tireless bloodhounds to root out
government inefficiency and waste of tax dollars.” Those who work for Citizens Against
Government Waste, founded by the Grace Commission’s eponymous leader, understand
President Reagan’s perspective better than most. There are some organizations that pick easy
tasks. You most certainly have not. There’s a lot of government excess to sniff out, and much
spending to howl about—and it sometimes seems like the only thing unleashed is the public
But take comfort in knowing that your work ferreting out waste, fraud, and abuse has
made a real difference. I’m sure you’ve heard the adage popularized by former Senate Minority
Leader Everett Dirksen: “A billion here, a billion there, and pretty soon you’re talking about real
money.” You have adjusted that sentiment for inflation, and then some: You’ve helped to save
American taxpayers over $1 trillion dollars over the years. Thank you for all that you’ve done to
reduce mismanagement and inefficiency in the federal government, and congratulations on your
Speaking of real money, the Federal Communications Commission, where I work, is
responsible for the Universal Service Fund (USF).
The USF currently distributes about $8.3
billion a year. This money comes from charges on Americans’ monthly phone bills.
You might have noticed that those charges have been going up in recent years. In
January 2009, the universal service contribution factor—which you see represented on your
phone bill as something like “Universal Service Charge”—was 9.5 percent. Today, it is 15.7
percent. That’s a 65 percent increase in the last five-and-a-half-years.
Where do all those dollars go? The USF spends money on four different programs. One
subsidizes phone service in areas of our country that are costly to serve, and is called the “high-
cost program.” Another subsidizes Internet access for schools and libraries, and is known as “E-
Rate.” A third subsidizes rural health care providers. And the fourth program is known as
“Lifeline.” It’s this last program that I’d like to focus on this morning.
The single largest driver of the increase in the USF—and hence, consumers’ phone
bills—has been the Lifeline program. Since January 2009, the high-cost program has grown by
Subsidies to schools and libraries have grown 11 percent.
Subsidies to rural health
care providers have grown 16 percent. But the size of the Lifeline program has grown by 102%,
more than double!
What exactly is the Lifeline program? Well, if you type “the Lifeline program” into
Google, the first link that comes up belongs to a life-insurance settlement program for seniors
promoted by the only living “Golden Girl,” the ever-charming Betty White. That’s not quite
what I had in mind.
The Lifeline program that is part of the Universal Service Fund provides discounts on
telephone service to low-income individuals. Eligible subscribers can enroll through their choice
of phone providers. Those providers, in turn, receive funds out of the Lifeline program equal to
$9.25 a month per customer or $34.25 a month for customers living on tribal lands. The FCC’s
rules allow discounts for landline or wireless service, but prohibit any household from getting
more than one Lifeline discount.
The Lifeline program has a noble purpose. It’s historically been a part of the FCC’s
effort to advance the principle of universal service—a principle that is enshrined in the very first
section of the Communications Act. When an emergency strikes and someone needs to call 911,
a phone line can indeed become a lifeline.
And for about a couple of decades after its inception in 1985, the program was generally
free of substantial controversy. During the last Administration, for example, Lifeline grew at an
annual rate of just 2.1 percent in real terms. Unfortunately, things quickly changed thereafter.
From the end of 2008 to 2012, the size of the program exploded from $819 million to
$2.19 billion, an increase of 25.9 percent a year in real terms. This growth was fueled by
substantial fraud and abuse. Phone companies were claiming subsidies for phantom customers or
siphoning multiple subsidies for the same person. Let me share just a couple of examples with
Consider the case of Icon Telecom, an Oklahoma telephone company. Icon’s owner was
part of a scheme to defraud the Lifeline program out of more than $27 million. Specifically, he
knowingly asked the FCC for subsidies for tens of thousands of phantom customers. Here’s how
the scheme worked: The company’s vendor had employees go through phone books in order to
find names and addresses and register unsuspecting people for the Lifeline program. Then, they
sold the phones registered to those fake customers on the street for $5 each.
The number of customers the company fabricated was astounding. In September 2011,
Icon reported having 2,200 customers in the program. Just over a year later, that number was
more than 135,000! That type of growth might even make Bernie Madoff blush. In order to
conceal this fraud, and to continue their phony customers’ “participation” in the program, the
vendor’s employees forged over 40,000 signatures. To cover up the fabrications, they used
different pens, different handwriting styles, and different formats for dates. And the icing on the
cake? Earlier this year, Icon’s owner pleaded guilty to money laundering for transferring over
$20 million from the company’s account to his personal account.
Or take the case of Associated Telecommunications Management Services. The U.S.
Department of Justice has alleged that the company, through the firm’s subsidiaries, fraudulently
received more than $32 million dollars from the Lifeline program between September 2009 and
March 2011. The three men who owned the subsidiaries and allegedly bilked the program out of
millions were indicted this April and charged with wire fraud, false claims, and money
laundering, along with conspiracy. With the ill-gotten millions they received from the Lifeline
program, they allegedly went on a spending spree. They purchased, among other things, a private
jet, a yacht named the “Knight Crew”, an orange Lamborghini convertible, a black Mercedes-
Benz S63, a black Cadillac Escalade, a blue Audi R-8, a red-bronze Corvette, and a Chevrolet
Suburban limousine. Somehow, I doubt they used coupons or credit card points.
Unfortunately, these stories are not isolated incidents. Lifeline has been laced with fraud.
The Wall Street Journal, for example, reported last year that among customers of the top five
carriers in the program, 41% were unable to demonstrate their eligibility for Lifeline or failed to
respond to requests to certify their eligibility. That’s more than two million people.
Of course, not all of this fraud involves yachts and Lamborghinis. But it is no less
pernicious. A common tactic has been for carriers to receive duplicative benefits for the same
customer, which is a clear violation of the FCC’s rules. For example, spot checks uncovered that
in just one state—Oklahoma —and in just one month—September 2012—one carrier received
duplicative support for 428 subscribers, a second received duplicative support for 307 customers,
and a third received duplicative support for 238 customers. And some carriers have been caught
receiving duplicative support for thousands of customers. One had 4,387 duplicative customers
in a spot check of just nine states.
And that’s only the fraud on the corporate side. On the consumer side, there’s substantial
evidence that some people are signing up with every Lifeline company around. Contestants on
“Who Wants To Be a Millionaire?” might get multiple lifelines, but the FCC’s rules permit only
one Lifeline account per household. And that’s going to remain our “final answer” as long as I
have anything to say about it. Nevertheless in the spring of 2013, the FCC identified 306
individuals, each of whom had signed up for at least four Lifeline accounts. Some actually had
11 accounts in their name!
Needless to say, this waste, fraud, and abuse is wrong. It is a moral and fiscal affront to
the hard-working Americans who have been forced to pick up the tab in their monthly phone
bills. And it harms those low-income Americans who are legitimately eligible for the program
and rely on it for phone service. Good people suffer when bad people profit.
After hearing all of this, you’re probably asking yourself: How could such rampant fraud
occur? There are a number of reasons. First, the size of the Lifeline program has been on
autopilot. Each of the other three USF programs—high-cost, E-Rate, and rural health care—has
been placed on a budget. So it would be impossible for any of these programs to have doubled in
size in three years without a vote among the FCC’s five Commissioners. Only the Lifeline
program remains uncapped. So spending can spiral out of control with no accountability.
Second, Lifeline expanded beyond landlines to cellphones provided by wireless
resellers—companies that use others’ networks because they don’t have their own. This
happened because the FCC eliminated the long-standing legal requirement that only providers
with their own network facilities could receive financial support from the Universal Service Fund.
Breaking the link between a Lifeline subsidy and investment in the network threw the door wide
open for fly-by-night operators and those looking for a quick buck. Indeed, the FCC’s decision
had the effect of welcoming many new carriers into the program whose sole business model was
to make money off of Lifeline. Many of them went on to perpetrate substantial fraud.
Third, the Lifeline program shifted from providing discounted phone service to free
phone service. When Lifeline customers had to contribute towards their own phone bills, there
was a strong incentive for them not to sign up more than once for the program. But when the
program expanded to include wireless resellers, carriers began to give away phones and minutes
for free. Needless to say, this made it much more enticing for people to sign up many times for
And fourth, the FCC failed to put in place effective anti-fraud measures. There were not
serious efforts to verify customers’ eligibility for the program, to prevent carriers from claiming
duplicative support for the same customer, or to block carriers from getting support for fake
customers. Despite the sudden growth in Lifeline subsidies in 2009, the FCC did nothing for
three years. Taken as a whole, the FCC’s approach to the Lifeline program was a recipe for
disaster. So the end result shouldn’t have come as a surprise to anyone.
Fortunately, there is some good news to report. In 2012, the FCC adopted new rules
designed to reduce waste, fraud, and abuse. For example, the agency created a National Lifeline
Accountability Database to prevent multiple carriers from getting subsidies for the same
customer. It also began to establish eligibility databases, making it easier for carriers to verify
consumers’ initial and ongoing Lifeline eligibility.
The Commission has also started to beef up its enforcement efforts. Between September
2013 and February 2014, the FCC proposed fines against eleven carriers totaling over $89
million. A single proposed fine was for over $22 million. In each of these cases, companies
allegedly received duplicative subsidies for the same customer in the same month. Within the
FCC, I was a strong advocate of proposing stiff financial penalties for blatant violations of the
Lifeline rules. I’m glad Chairman Wheeler and my other colleagues saw it the same way and that
each of these forfeiture proposals was adopted by a unanimous vote.
These initiatives have begun to bear fruit. From 2012 to 2013, Lifeline spending fell by
almost 18%. So when it comes to combatting fraud, we are at least starting to move in the right
But there’s much more work to be done. Even in 2013, Lifeline spending was more than
double what it had been only five short years before. So here are four simple steps that we should
take to further reduce waste, fraud, and abuse in the Lifeline program.
First, the time has come to put the Lifeline program on a budget. It’s as true for a federal
program as it is for a family: A budget induces careful spending. A Lifeline budget will increase
incentives to eliminate fraud and improve accountability within the program. And placing a cap
on Lifeline spending will prevent any future explosion in spending without direct Commission
Now, some might complain that Lifeline is too important to have a spending cap. But the
other three components of the Universal Service Fund—the E-Rate program, rural health care
program, and high-cost program—are also important. Each of them is currently on a budget.
Lifeline should be, too.
Second, we must reduce the financial incentives for people to commit Lifeline fraud. As
I indicated earlier, Lifeline was not designed to give people free phone service. It was intended to
provide low-income consumers with discounted phone service. And the recent shift to free
wireless service plans has dramatically increased the incentive for individuals to break the FCC’s
rules by signing up for the program more than once.
The FCC has several options for properly aligning people’s incentives. One option
would be to prohibit wireless carriers participating in Lifeline from giving away free phone
service to Lifeline recipients. Instead, recipients of wireless service would make at least a
minimal monthly contribution. Requiring some skin in the game would align the Lifeline
program with our other universal service programs, each of which requires some contribution by
recipients to cut down on waste, fraud, and abuse.
A second option would be to empower the states to play a stronger role in helping to
police the program. The Lifeline program has historically been a federal-state partnership, with
states offering their own funds to supplement the federal program and doing their part to squelch
misconduct. But a recent court ruling has threatened that partnership—preventing the State of
Georgia from taking reasonable steps to cut down on fraud, such as requiring a minimum
contribution from Lifeline subscribers. Nothing in the law prevents the FCC from clarifying that
states are free to take appropriate measures to ensure the integrity of the program.
A third option would be to review the size of the current Lifeline subsidy—$9.25 per
month—and ask whether it’s too high, given that it often pays for the entire cost of a monthly
phone bill. Cutting the monthly support amount would directly cut both the incentive for fraud
and the phone bills for consumers who pay into the USF. And it would better account for the
falling costs of wireless service, so that consumers, not Lifeline carriers, benefit from the
industry’s newfound efficiencies.
Third, the FCC should fill the gaps in its rules that still encourage fraudulent behavior.
For example, Lifeline carriers don’t have to keep proof that consumers are eligible for the
program when they sign up. Some of them distribute free Lifeline phones on the spot, without
verifying that consumers are eligible or that they live where they say they do. All of this means
it’s almost impossible for us to make sure that Lifeline funds will be wisely spent before we start
Reform here shouldn’t be hard. Requiring carriers to maintain customers’ proof of
eligibility is common sense. And prohibiting the free-phone events that show up on YouTube—
well, I just don’t see why we’d want to encourage such behavior. These steps would eliminate
some of the most glaring examples of abuse, which is something everyone should support.
And fourth, the FCC must step up its enforcement efforts. To be clear, I’m glad that the
FCC has proposed substantial forfeitures against carriers for allegedly violating our Lifeline rules.
But that’s not the end of the process at the FCC. After proposing forfeitures and receiving the
company’s response, the FCC must take another vote to impose a forfeiture. So while proposing
forfeitures generates good publicity for the agency, that alone isn’t good enough. What really
counts is imposing forfeitures.
Now is the time to take that step with respect to Lifeline fraud. Spotting violations only
to let cases languish—all while providers continue to participate in the program—is not the way
to combat abuse. As Yoda put it in The Empire Strikes Back, “Try not. Do . . . or do not. There
is no try.”
Now is the time for the Commission to hold up-and-down votes. If we don’t, we will
invite more fraud by sending the signal that the FCC won’t actually seek to collect fines.
Taking such action will also help us move aggressively to kick out of the Lifeline
program those who perpetrate fraud. Take, for example, the case of True Wireless. Its owner
was one of the three men indicted by the Department of Justice for Lifeline fraud three months
ago in connection with the Associated Telecommunications Management Services case I
discussed earlier. And the FCC has proposed to fine the company over $5 million for getting
duplicative subsidies for the same customers.
Yet, True Wireless is still receiving disbursements from the Lifeline program. So at the
same time that the federal government was attempting to seize the CEO’s 2010 Audi R8, his
company received about $1.5 million in federal funds last month.
Twiddling our thumbs in the
face of all this? That’s not right.
Taken together, I am confident that these four proposals—imposing a budget, properly
aligning financial incentives, filling gaps in our rules, and stepping up enforcement—would help
to further reduce the waste, fraud, and abuse that have run rampant in the Lifeline program. At
the same time, they would allow low-income consumers who are genuinely in need to get a
discount on phone service.
I am under no illusion that it will be easy to get these things done. You know far better
than most how difficult it can be to eliminate government waste. But we owe it to all Americans
who fund the Lifeline program through their monthly phone bills. We should do whatever we
can to ensure that their hard-earned money isn’t wasted and doesn’t end up in a fraudster’s bank
account or automobile garage.
Thanks once again for letting me speak with you this morning. And to borrow from
former Senator Phil Gramm, when it comes to government spending, I hope you continue to do
the Lord’s work in the Devil’s city.
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