FCC Announcement: New Category 2 Rules

FCC Issues New Category Two Rules

The Federal Communications Commission has issued a highly anticipated Report and Order (12/3/2019), that makes notable and permanent changes to E-rate rules for Category Two funding applications.

The new rules will require substantial changes to application processing and USAC procedures, and as we are in the thick of the Funding Year 2020 application cycle, most of these rules will not go into effect until FY 2021. So, what’s happening for FY 2020?

The Big Picture: Category Two is Here to Stay

The FCC has made permanent the “Category Two budget” approach that the Commission adopted in the 2014 Modernization Orders to fund internal connections, ensuring that the pre-Modernization “Two in Five” rules will not come back. This is a very positive development for applicants, as it allows for long-term planning without the uncertainty of possible budget-busting rule changes on the horizon.

The “Gap Year”: FY 2020

A common question we’ve been getting asked recently is, “What’s happening with Category Two for 2020?” Finally, we have an answer, and it is “more of the same, with a little surprise.” Essentially, the FCC has ordered that the five-year “test period” that the Modernization Orders created and which ran from FY 2015-2019 will be extended through 2020. ALL applicants, even those who started spending Category Two funding in 2015, will be able to continue using that funding in 2020.

The “little surprise” is that the FCC is also giving every applicant a “prorated budget” for FY 2020; in other words, what was a five-year budget at $30 per student per year (or $150 per student total) has been extended to a six-year budget at $30 per student per year, or $180 per student total. If you’ve already drained your budget, you will now have a year’s worth of it to utilize in 2020, and those who have not accessed these funds at all will see their budgets grow by 20%.

EducationSuperHighway strongly encourages applicants who have any needs for eligible Category Two equipment to utilize these funds in 2020, as this initial Category Two budget cycle will end with this Funding Year, and these funds will be reset for 2021.

What rule changes will go into effect in 2021?

The changes to the Category Two program will begin with 2021. Although we would have liked to see the FCC add some additional eligible products (such as filtering and security appliances) and increase the per-student budget more substantially, we applaud the changes that they did make to the program. The changes will reduce the administrative burden on applicants, streamline the review process, and incentivize smaller applicants to access their Category Two funding. The most significant changes to the program are as follows:

Category Two budgets will be calculated on a school district-wide budget basis
This is the rule change that was most widely requested, and that will make the most substantial positive impact on applicants. School districts and other multi-site applicants will now have a single Category Two budget to administer, and their decision-makers will now have the ability to allocate internal connections equipment and resources where they are most needed, as opposed to having each school in its own budgetary silo. Applicants will also be free to move already-purchased E-rated equipment from one site to another as needed (although they will still be required to maintain accurate inventories and note when equipment is moved).

All applicant budgets will be reset, and budget cycles will be fixed
To facilitate the transition to the new rules, the FCC will reset all budgets to the full amount eligible under the new rules. All applicants will start with a new five-year budget cycle beginning in Funding Year 2021, regardless of whether they completed their previous five-year budget cycle during the test period.

The adoption of fixed five-year budget cycles means that the first such cycle will run from FY 2021 through 2025. Applicants may submit applications in any Funding Year during this five-year cycle as long as they have funds remaining in their budget.

The “Funding Floor” has been increased
There is enhanced support for small and rural schools, as the per-site funding floor will increase from $9,200 to $25,000. In other words, any school with less than 150 students will receive the $25,000 budget. During the initial test period, applicants who were at or near the budget floor were the least likely of all applicants to utilize their Category Two funds. Increasing this minimum while simultaneously simplifying the budgeting and application process provides a solid incentive for these small applicants to get in the game and utilize these funds.

The Per-student budget multiplier and student counts move to a five-year cycle
Category Two budgets will be calculated as an inflation-adjusted $167 per student for schools (rounded up for administrative simplicity) for the new five-year funding cycle beginning in Funding Year 2021. No longer will the per-student multiplier be refactored every year; instead, a new multiplier will be issued at the start of each five-year cycle. This will make tracking your budget much easier as well as reducing the administrative burden on USAC.

Additionally, applicants will only need to provide student counts for schools once at the beginning of each five-year cycle.

Student counts based on full-time enrollment.
From 2021, the FCC will base student counts on full-time enrollment only and eliminate the need for schools or school districts to count part-time students in their enrollment numbers. They will also no longer permit school districts to estimate the number of students for buildings under construction because those students will otherwise be accounted for by the district enrollment numbers.

These new rules will simplify the student count process, but we will be curious to see how it impacts the ability of applicants who are building new campuses to access funds to equip those sites with the necessary technology infrastructure.

No new eligible services have been added
The FCC has made permanent the eligibility of managed internal broadband services, caching, and basic maintenance of internal connections. While we are disappointed that the FCC chose not to add mission-critical security devices to the list, we are happy that the basic structure of eligible Category Two products and services has been made permanent. As in the past, the Eligible Services List will continue to be reviewed and updated on an annual basis.

What rules are in place for Funding Year 2020?

  • Category Two budgets will be calculated using the same per-site methodology used in Funding Year 2015-2019. USAC has announced that the new, six-year budget for each school site is $195.63 per student, including inflation adjustments.
  • All applicants’ site budgets will be increased by 20% (i.e., one-fifth of the maximum Funding Year 2020 Category Two budget) for Funding Year 2020.
  • All Category Two site budgets will expire at the end of Funding Year 2020 and will not carry over to Funding Year 2021.
  • Caching equipment and services, Basic Maintenance of Internal Connections, and Managed
  • Internal Broadband Services are retained as eligible services, with no new services added to the Eligible Services List.
  • Applicants can seek Category Two discounts up to each site’s maximum budget amount, less any amount utilized in the initial five-year period.