The percentage of end user phone bills that goes toward the Universal Service Fund has been climbing and there are serious questions about the sustainability of that funding mechanism, despite a relatively stable USF budget. It’s something Telecompetitor has warned about previously, and in this post, we offer some factual numbers to illustrate our concerns.

The USF is actually four separate funds – the low-income Lifeline fund, the rural healthcare fund, the E-rate schools and libraries fund and the high-cost fund. The latter includes the Connect America Fund (CAF) and the mobility fund, and in the future will include the Rural Digital Opportunity Fund, which will replace the CAF.

The money for these funds comes from companies that offer interstate and international long-distance telecom services (i.e., voice services). At one time most of the money went toward voice services but over the years, more and more of it has gone towards broadband. Service providers generally pass these costs on to consumers in their monthly phone bill.

Broadband revenues aren’t considered telecom revenues, however, which means that even though USF dollars go toward building and maintaining broadband networks and toward broadband service for low-income users and toward broadband to support schools, libraries and telehealth, all those programs are still funded as a percentage of traditional telecom revenues.

Universal Service Fund Budget
The total money spent on the four USF programs has fluctuated somewhat over the years, but thanks to spending caps, the total budget remains in the range of $8 billion annually.

Source: FCC, Telecompetitor

Despite the relative flatness of USF expenditures, the contribution factor – the percentage of carrier telecom revenues that goes toward USF – has been climbing. As of late 2010, the percentage of revenues that carriers had to pay into the fund – known as the contribution factor – was 12.9%. As of late 2019, that number had nearly doubled, climbing to 25%.

Source: FCC, Telecompetitor

The reason for the steep climb in the contribution factor is simple: Carriers’ interstate and international telecom revenues, known as the contribution base – have been declining.

The Contribution Base
In 2010, the contribution base was almost $72 billion. By 2019, it had fallen to $52.9 billion – and assuming the trend continues, those revenues could fall below $20 billion by 2030, at which point nearly half of service providers’ interstate and international telecom revenues would be going toward Universal Service. That’s assuming the USF budget remains flat at around $8 billion. If we factor in even a small inflation factor, the funding needed could hit or exceed 50% of the contribution base.

USF Contribution Base ($ millions) Source: FCC, Telecompetitor

A logical question is why the FCC doesn’t expand the contribution base to include broadband revenues, considering that the funding now is going, in large part, toward broadband. The answer is political.

Opponents position that move as “taxing the internet” – a concept that undoubtedly wouldn’t poll well, considering how many things come for free on the internet and considering that the average American probably would assume it means the money would go into the general fund.

Perhaps if the issue were better understood, it would have more support, and the idea of making these charts came, at least in part, with that goal in mind. (All data is from the 2019 Universal Service Monitoring Report.)

Perhaps there also are other ideas that could help address the situation. For example, some people have suggested allocating a portion of proceeds from various auctions to go toward rural broadband. That would seem to be a one-shot cash infusion, rather than a sustainable funding source, but perhaps there is a way to collect the money from licensees on an annual basis.

The important thing, it seems to me, is to start thinking about this now.

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One thought on “Is Universal Service Fund in Peril? A Close Look at the Budget – and Where the Money Comes From

  1. Kill the USF. It is a parasitic tax on services. These kinds of taxes often never go away and grow and grow. For example, we've had a similar type tax whose original "justification" was to pay for the Spanish-American War- the Federal telephone excise tax.

    Kill this parasite.

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