Introduction
Background
Until 2000 California’s kindergarten through 12th‑grade (K–12) schools, school districts, and county offices of education were individually responsible for obtaining access to the Internet and for connecting with other educational entities and resources as needed. In 2000 the program that would later be known as the California K–12 High Speed Network (K12HSN) was established to connect the State’s public school system to the high‑speed network created for use by California’s universities and community colleges. Between fiscal years 2000–01 and 2003–04, the University of California (UC) received more than $93 million in state appropriations to expand the universities’ network infrastructure to K–12 schools and county offices of education for K12HSN.
In July 2004, the Legislature shifted funding from UC to the California Department of Education (Education) and established the K12HSN program to enrich pupil educational experiences and improve academic performance by providing high‑speed, high‑bandwidth Internet connectivity to the public school system. It also required that a lead county office of education be selected to administer the K12HSN program. Subsequently, in September 2004, Education selected the Imperial County Office of Education (ICOE) via a grant application process to administer the program on the State’s behalf.
In 2006 the Legislature amended the Education Code to add section 11800 (EDC 11800), which statutorily established the K12HSN program and its administration by a local educational agency. ICOE is currently continuing in its role as the program’s administrator. EDC 11800 assigns the state superintendent of public instruction (superintendent), who oversees Education, the responsibility for measuring the success of K12HSN and ensuring that its benefits are maximized to the extent possible. Finally, EDC 11800 assigns the superintendent the responsibility of establishing a K12HSN advisory board composed of 12 members—a majority of whom are county and school district superintendents—to meet quarterly and to provide policy direction and guidance.
When ICOE assumed administration of K12HSN from UC, it continued UC’s practice of contracting with the Corporation for Education Network Initiatives in California (CENIC), a nonprofit organization created to operate and maintain the California Research and Education Network (CalREN). According to CENIC, CalREN is configured with a backbone—a high‑capacity network designed to meet the unique requirements of more than 20 million users, including the State’s K–12 system, public libraries, California Community Colleges, the California State University system, the UC system, and certain private universities in the State.
The network ICOE oversees consists of 86 network sites, most of which are located at county offices of education, as shown in Figure 1. Schools’ and districts’ network traffic flows through these sites via individual connections, known as circuits, to the backbone. School districts connect to the network via one or more of the network sites, and districts contract with local Internet service providers (service providers) for those connections. According to statistics from K12HSN, its 86 network sites currently provide connectivity for 83 percent of California public schools, 85 percent of school districts, and all county offices of education, serving nearly 4.8 million students overall.
In addition to ICOE’s primary function of overseeing the physical network of the sites and their connections to the backbone, recent budget acts have made ICOE responsible for distributing grant funding to schools with insufficient connectivity for computer‑based testing of students. According to Education’s fact sheet on the California Assessment of Student Performance and Progress (CAASPP) system of computer‑based assessments, in January 2014, CAASPP replaced the former paper‑based assessments. To address the needs of schools and school districts that do not have sufficient network capacity to conduct computer‑based online testing, the Legislature appropriated to Education approximately $26.7 million for fiscal year 2014–15 and an additional $50 million for fiscal year 2015–16 to help schools and school districts obtain the network capacity needed to administer computer‑based assessments. These funds are known as Broadband Infrastructure Improvement Grants (BIIG), and state law directs ICOE to distribute the funds in consultation with Education and the State Board of Education based on an assessment of need. The law also requires the sites that receive the BIIG funds to pay the ongoing costs associated with the improved Internet infrastructure. As a result, ICOE’s involvement with those schools’ and districts’ Internet connectivity is temporary and exists outside of its core function of operating K12HSN.
Figure 1
Structure of the K12HSN Program’s Network
Sources: California State Auditor’s analysis of CENIC’s contract with ICOE, Education’s grant award letters, and K12HSN network maps.
Federal and State Subsidies for K12HSN Activities
The Universal Service Administrative Company (USAC)—a not‑for‑profit organization designated by the Federal Communications Commission—administers a federal subsidy program that provides discounts for telecommunications and Internet services used by public schools and libraries. This program has become known as the education rate or E‑Rate program (E‑Rate). E‑Rate is supported by the Universal Services Fund, which in turn is funded by required contributions from telecommunications carriers, including wireline, wireless, and Voice Over Internet Protocol providers. E‑Rate subsidizes 20 to 90 percent of the cost of Internet access and telecommunications services for educational providers, based on the percentage of students eligible for free or reduced‑price lunch under the National School Lunch Program and whether the school is rural or urban. Through an external consultant, CENIC applies for E‑Rate funding for K12HSN for Internet access and telecommunications costs and upgrades. As shown in Figure 2, there are two methods through which K12HSN may ultimately collect the subsidy. Under one method, the service provider reduces the amount charged to CENIC by the value of the anticipated subsidy and then collects the subsidy from USAC. Under the other method, which is more commonly used, the service provider charges CENIC, which in turn charges K12HSN for the entire cost of the service, and then the provider reimburses K12HSN through CENIC when it receives the subsidy. Because of the extensive duration of the E‑Rate process, many of the subsidies pertaining to a given fiscal year are not credited to K12HSN until the following year. In those cases, K12HSN accrues the amount of the anticipated subsidies and in the meantime uses other available funds to cover its costs.
Another Internet subsidy known as the California Teleconnect Fund (Teleconnect Fund) is administered by the California Public Utilities Commission and credits K12HSN for half of the Internet access costs not covered by E‑Rate. This subsidy also applies to the fixed fee that K12HSN pays annually to CENIC in exchange for transmitting network traffic through the backbone to other parts of the network. In most cases, K12HSN Internet access costs eligible for the Teleconnect Fund subsidy are discounted up front rather than through a subsequent reimbursement process.
Figure 2
Process Used by CENIC to Obtain Federal Broadband Subsidies for the K12HSN Program
Sources: USAC E-Rate program guidelines and K12HSN’s contracts with CENIC.
* Before 2007, CENIC could request and receive reimbursement directly from USAC for services paid in full.
Major Program Revenue and Expenditures
Apart from the state and federal subsidies just described, all other major program revenue that ICOE receives is state funding. This funding amount fluctuated early in ICOE’s tenure as the program administrator, but it held steady at about $8.3 million annually for several years until recently, when the State raised questions about the appropriate funding amount for the program. We discuss these issues in the first section of this report.
K12HSN expenditures consist of ICOE’s internal costs for overseeing the program, such as personnel, and its contracted agreements with external parties. ICOE’s capital equipment expenditures for K12HSN include both equipment purchased for ICOE’s use in administering the program as well as equipment purchased and placed into service at the network sites. One of ICOE’s most significant agreements with an outside entity is a formal memorandum of understanding with the Butte County Office of Education to pay for a specialist in obtaining E‑Rate and Teleconnect Fund subsidies to assist California schools and school districts with applying for those funds, which schools and districts can use to offset the costs of their own Internet connections. ICOE also has an agreement with a private consulting firm for educational agencies to provide consulting services related to legislative activities at the state level. However, the majority of K12HSN’s expenditures pertain to its contract with CENIC for the operation and administration of the physical high‑speed network. As the administrator of the network, CENIC is responsible for entering into and servicing contracts with service providers throughout the State and for purchasing network equipment on behalf of K12HSN. Table 1 provides more detail about the program’s revenue and expenditures from fiscal years 2013–14 through 2015–16.
Table 1
K12HSN Program Revenue and Expenditures
Fiscal Years 2013–14 Through 2015–16
| FISCAL YEAR 2013–14 | FISCAL YEAR 2014–15 | FISCAL YEAR 2015–16 | ||||
|---|---|---|---|---|---|---|
| AMOUNT | PERCENTAGE | AMOUNT | PERCENTAGE | AMOUNT | PERCENTAGE | |
| EXPENDITURES | ||||||
| Operations* | $547,477 | 5% | $743,441 | 6% | $855,149 | 6% |
| Personnel | 1,297,777 | 12 | 1,425,313 | 12 | 1,413,641 | 11 |
| Equipment† | 92,620 | 1 | 499,496 | 4 | 739,314 | 6 |
| CENIC | 8,846,453 | 80 | 8,871,463 | 74 | 9,463,998 | 71 |
| Other Agreements | 296,716 | 2 | 423,936 | 4 | 759,648 | 6 |
| Total Expenditures | $11,081,043 | $11,963,649 | $13,231,750 | |||
| REVENUE | ||||||
| State Appropriation | $8,340,000 | 67% | $8,340,000 | 69% | $0‡ | 0% |
| Other Revenue§ | 128,359 | 1 | 93,441 | 1 | 33,159 | 1 |
| E-Rate and Teleconnect Fund Subsidies (Reimbursements) | 4,006,237 | 32 | 3,663,457 | 30 | 3,585,764 | 99 |
| Total Revenues | $12,474,596 | $12,096,898 | $3,618,923 | |||
| Year-End Surplus (Deficit) | $1,393,553 | $133,249 | ($9,612,827) | |||
Source: California State Auditor’s analysis of ICOE accounting data.
Note: The revenue and expenditures in this table represent the money ICOE collected and spent during each fiscal year.
* Costs identified as Operations include communications and supplies, debt service, and some external consulting that is not included in the Other Agreements category.
† According to the K12HSN chief executive officer, in fiscal year 2014–15 ICOE began classifying the equipment installed at network sites as capital expenditures. As a result, from fiscal year 2014–15 on, its accounting data identify those costs as equipment expenditures, whereas previously it had included those costs in the CENIC category.
‡ Because K12HSN did not receive any funding from state appropriations for fiscal year 2015–16, ICOE used K12HSN’s operating reserve to pay for the portion of program expenditures not covered by Internet subsidies and other funding sources.
§ Other Revenue includes funds ICOE collected in exchange for the delivery of videoconferencing services to higher education entities.