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A Project of The Annenberg Public Policy Center

Congressman’s Slippery Cell Phone Claim

A congressman’s Web video goes too far when it portrays a program that subsidizes cell phone service for very low-income persons as a government giveaway that is costing taxpayers billions.

The video also misleadingly claims Arkansas Rep. Tim Griffin is “reforming” the program. His proposed legislation — the “Stop Taxpayer-Funded Cell Phones Act of 2011” — actually would eliminate the cell phone subsidy.

Griffin’s video focuses on Lifeline, a federally mandated program that reimburses phone companies with a monthly subsidy of $9.25 for each low-income customer who uses a landline or a cell phone. The program has allowed millions of persons living under or just above the poverty line to acquire cell phones — once considered a luxury — for free.

Lifeline is funded by telecom customers who pay a universal service fee as part of their phone bills. The fee technically is not a tax but a cross subsidy, the rules of which are determined by the Federal Communications Commission.

The video gives a wholly one-sided account of the program’s widespread abuse. It’s true that Lifeline’s costs doubled in five years to $1.75 billion in 2011 while tens of millions of dollars have been lost to fraud. Surveys found an average of 9 percent of Lifeline users in 17 states and territories were ineligible for the program, while recent audits found 400,000 instances of one person — or one household — having more than one subsidized connection. Some phones were sold for cash on Craigslist.

The FCC, however, overhauled the program in February, enacting changes that call for building databases to confirm beneficiaries’ eligibility and to identify duplicate subscriptions. The FCC also slashed 75 percent of available subsidies for the program, which eliminated a “perverse” incentive for some phone companies to enroll ineligible persons. The FCC projects its modifications will save up to $2 billion over three years. Griffin’s video ignores those measures while highlighting only the abuses.

Griffin, a freshman Republican representing parts of central Arkansas, released the Web video in early May. Griffin introduced his “Stop Taxpayer-Funded Cell Phones Act” in November 2011. The bill was referred to the House Subcommittee on Communications and Technology.

Our thanks to John Heath of Marion, Ark., who uploaded the video to our Spin Detectors website, through which we ask our readers to help us monitor political claims and campaigns across the country.

‘Tax’ vs. Fee

Griffin’s video portrays Lifeline as a taxpayer-funded program. Technically, it’s not. Telecom customers cover the cost.

Griffin’s video: Uncle Sam’s unlimited plan: How the government’s cell phone giveaway is costing you billions. In this week’s edition, we’ll look at how a government program designed to help low-income individuals has become the latest example of wasteful spending. …

Congressman Tim Griffin is leading the way in reforming this program. He’s introduced the Stop Taxpayer-Funded Cell Phones Act. …

The video — using a clip from a news show — briefly acknowledges that the subsidized cell phones are funded by “a hidden fee that’s on your cell phone bill.” But the rest of the video portrays the fee as a government tax. Griffin suggests the program is an example of wasteful federal spending when he says: “If we can’t cut this, then we’re in big, big trouble when it comes to cutting other wasteful spending because this is easy.”

We tackled a similar claim in 2009 regarding the so-called “Obama phone.” As we explained then, the FCC requires phone companies to fund “universal service” programs such as Lifeline that improve telecommunications access to all Americans. The companies pass the cost along to consumers in the form of a universal service fee, which is listed on a monthly phone bill.

The fees go into the Universal Service Fund, which is administered by the Universal Service Administrative Company, an independent, not-for-profit corporation. USAC manages Lifeline and three other programs that provide telecommunications services to rural areas, schools, libraries and places where it’s more expensive to provide access.

USAC charges telecom companies based on quarterly projections of demand for the universal services. Companies currently pay 17.4 percent of their revenues from customers’ state-to-state and international calls. AT&T, for example, passes on the same rate to its customers. The rate has been increasing for more than a decade. In the second quarter of 2000, it was 5.7 percent.

Households currently spend an average of $2.50 to $2.75 in universal service fees each month, according to an FCC spokesman. Those figures include all of the landline, wireless and voice-over-Internet connections in a house. For a $140 family wireless plan, the fee amounts to about $3, the spokesman said.

Last year, USAC spent $8.1 billion on its universal service programs, paying $1.75 billion toward Lifeline, which benefited 13.7 million households in 2011.

Lifeline is the third largest of USAC’s four programs. But the proliferation of cell phones, and particularly prepaid phones, led to increased spending in the program. Lifeline doubled its budget from $820 million in 2006 (see page 42) to $1.75 billion in 2011.

Lifeline does not “give away” “government phones.” The program reimburses phone companies with a monthly subsidy of $9.25 for each low-income customer who uses a landline or a cell phone. States may provide additional subsidies. Some phone companies have found ways to provide free cell phones and free service covered entirely by the reimbursement. Before the FCC’s changes, Lifeline’s Link Up program also offered companies $30 to cover the cost of a new phone connection.

Lifeline is available to recipients of low-income entitlement programs and persons living at or below 135 percent of the poverty line, which is $31,118 for a family of four in the continental U.S. (Some states have their own eligibility requirements.) The FCC forbids phone companies from charging Lifeline recipients the universal service fee.

Griffin’s office emailed us a statement from the congressman, claiming the fee is a tax: “The Lifeline program would not exist if it weren’t for the money collected from taxpayers, and even a senior FCC official has acknowledged that consumers pay a ‘tax’ in order to support the Universal Service Fund.”

Indeed, FCC Commissioner Robert McDowell described the fee as a “tax,” although McDowell put the word in quotes.

But technically, the universal service fee is not a tax but a cross subsidy overseen by the FCC. The U.S. Treasury does not collect or handle the funds. Griffin’s description goes too far.

Ignoring FCC Changes

Griffin’s video gives a wholly one-sided account of fraud in the Lifeline program. Abuse, depicted in the video with snippets of television news programs, is real. But the video ignores the FCC’s 299-page order to address the program’s vulnerabilities.

In 2010, the nonpartisan Government Accountability Office found several weaknesses in the Lifeline program. For instance (see pages 35 to 37):

  • Subsidized phones ended up being sold for cash on Craigslist or were sold to potentially ineligible subscribers.
  • Florida’s Public Utility Commission found that 8 percent — or 33,000 — of its Lifeline accounts were inactive. Or the phones’ users ignored requests to confirm they were eligible.
  • USAC’s internal controls failed to adequately identify all of the program’s risks, such as identifying subscriber eligibility and the accuracy of amounts claimed for reimbursement.

In 2011, USAC conducted an eligibility survey (see page 243) of Lifeline customers in 17 states and territories. The survey found that an average of 9 percent of users were ineligible and 27 percent failed to respond.

In January, the FCC completed an audit of 12 states’ service records and found that 7 percent of subscribers (269,000 of 3.6 million) used more than one subsidized line, costing Lifeline $35 million a year. A second audit released this month found 135,000 duplicate subscriptions in three more states, costing another $15 million. The FCC said it disconnected those phone lines, generating $50 million in savings.

The audits are part of the FCC’s overhaul. The changes, enacted in February, include:

  • The creation of a database to prevent one person from having more than one subsidized phone line.
  • The creation of a database (by the end of 2013) to ensure subscribers are eligible for Lifeline.
  • The end of the Link Up program, which gave phone companies $30 for each new subsidized connection. Link Up was originally intended to cover the cost of installing a new phone line. But it gave prepaid wireless carriers a “perverse” incentive to sign up ineligible subscribers. (Not all cell phone companies took the Link Up subsidy.)

The FCC claims the overhaul will save up to $2 billion in three years, reducing growth in the fund and “keeping money in the pockets of American consumers.” The commission fails to state whether the savings could reduce the universal service fee. The Lifeline program will use some of the savings — up to $25 million — on a pilot program to help low-income persons gain access to broadband Internet service.

The commission plans to assess its changes after six months and one year. The GAO followed up on its own assessment of Lifeline in 2012, finding that the FCC is making progress in addressing Lifeline’s vulnerabilities.

Time will reveal the overhaul’s successes or failures. And even McDowell, the FCC commissioner, said he isn’t confident of the projected savings. But Griffin’s video misleads by highlighting Lifeline’s waste while ignoring the overhaul.

‘Original Intent’

Griffin’s video claims his bill will restore the program to its “original intent.” But the video fails to explain that the proposed legislation would end cell phone assistance and support only a landline subsidy.

Griffin video: He’s introduced the Stop Taxpayer-Funded Cell Phones act, which will end abuse while protecting those who need the program by restoring it to its original intent.

In his statement to FactCheck, the congressman explained that original intent “refers to the Lifeline program’s original iteration in 1984 involving landline phones.” Griffin’s interpretation is off the mark, ignoring the precedent of major telecommunications legislation and FCC policy.

A brief history: The Telecommunications Act of 1934 created the FCC and established the informal policy of providing universal service to “all the people of the United States.” In 1985, the FCC implemented Lifeline to help low-income households in case phone rates increased after the breakup of AT&T. The Telecommunications Act of 1996 codified the universal service policy.

Telecommunications Act of 1996: Consumers in all regions of the Nation, including low-income consumers and those in rural, insular, and high cost areas, should have access to telecommunications and information services, including interexchange services and advanced telecommunications and information services, that are reasonably comparable to those services provided in urban areas and that are available at rates that are reasonably comparable to rates charged for similar services in urban area. …

Universal service is an evolving level of telecommunications services that the Commission shall establish periodically under this section, taking into account advances in telecommunications and information technologies and services.

The congressman’s statement to FactCheck said the universal service mandate fails to mention wireless phone service. It fails to mention landlines, too.

Following the 1996 act, the FCC revised Lifeline, stating that carriers contributing to the program are those that provide interstate telecommunications service — including wireless companies.

The commission maintains that, in accordance with the universal service mandate, “telephone service is essential for finding a job, connecting with family, or getting help in an emergency.” The FCC cites a 2010 Centers for Disease Control and Prevention survey, which found that “adults living in poverty (42.8%) and adults living near poverty (35.2%) were more likely than higher income adults (24.1%) to be living in households with only wireless telephones.”

— Ben Finley