K-20 Education Network
Policy

K-20 Network Education - Revised Blueprint
Conditions of Use and Acceptable Use Policies - AUP's

A Sustainable Funding Mechanism for the K-20 Network: Recommendations to the Legislature

Report of the Telecommunications Oversight and Policy Committee

February 20, 1997

This paper recommends to the Legislature a funding model for the K-20 network. It is based on a white paper prepared by the Information Services Board (ISB), and incorporates findings of the Telecommunications Oversight and Policy Committee (TOPC) members as set forth at the November 27, 1996, January 9, 1997, and February 20, 1997, TOPC meetings.

The key elements of this proposed funding model are as follows:

• The $42.3 million should be allocated to costs related to construction of the backbone infrastructure and initial start-up costs.
• The costs of ongoing operations of the shared infrastructure should be funded through an internal service fund -- a sustainable funding source frequently used in state government to provide ongoing utility services.
• Beyond the shared infrastructure, equipment which resides at and is used exclusively by an individual institution should be owned, operated and maintained by the institution, and should be outside the scope of the internal service fund.

Assumptions

The funding model is based on the following assumptions:

• The Legislature intended that the $42.3 million appropriation be used for construction and start-up of a shared state educational telecommunications infrastructure.
• The appropriation was not intended to -- nor could it -- provide every educational institution in the State with on-premises equipment or the ongoing costs associated with such equipment or advanced telecommunications services.
• Biennial appropriations for the operation and maintenance of the K-20 network may not be provided in perpetuity. While further appropriations may be anticipated, neither the TOPC nor the institutions to be served by the network can assume continuing appropriations beyond the current biennium.

The internal service fund for operations and maintenance of the K-20 backbone

An internal service fund is a type of revolving fund used to account for state activities that provide goods and services on a cost-reimbursement basis to state agencies and other governmental entities.

Examples of internal service funds in Washington State government include the Central Services Fund (supporting legal services, auditing, facilities management, and other administrative services provided to state agencies); the Equipment Revolving Fund (accounting for the purchase, repair, maintenance and replacement of equipment used for state highways and public lands management); and the State Data Processing Revolving Fund (supporting statewide telecommunications and data processing services provided by the Department of Information Services as well as information technology services offered by the Department of Personnel and the Office of Financial Management).

Consistent with these models, this proposal is to create a new K-20 Revolving Fund administered by the Department of Information Services (DIS). Administrative responsibility is consistent with DIS' current administration of the revolving fund for telecommunications services to state agencies.

How the fund works

Network users would support the network through rates based on a pre-arranged proportion of the available infrastructure matching their anticipated needs. These rates should cover the costs of utilization, ongoing operation, maintenance and replacement of the shared infrastructure. Formulas for cost allocation would be determined through a consultative process including network users, OFM and DIS to ensure that rates are sufficient and that each institution pays an appropriate share of the costs.

The schools and colleges agree that a "metered" approach is inappropriate in that it would provide a disincentive to institutions to make use of telecommunications and create unnecessary network overhead and a bureaucracy to count and bill user hours. DIS' long experience with metered services indicates that it is costly and difficult to manage. Indeed, one TOPC member noted that private telephone companies currently incur as much as 30 percent of their costs in billing for metered services.

One approach may be to establish rates based on the level of bandwidth connectivity provided to the institution. To ensure needed flexibility, the specific factors to be used in setting rates should be determined by the network administrator, OFM, and the network users, and should not be set forth in statute.

The newly-enacted federal Telecommunications Act of 1996 calls for telecommunications services to public schools, libraries and health care providers to be subsidized by telephone customers. The Federal/State Joint Board -- a committee of state regulators, Federal Communications Commission (FCC) members, and the public charged under the Act to address universal service issues -- has recommended to the FCC that it provide discounts of 20 to 90 percent based on need, with a total cap of $2.25 billion nationwide. It further recommends that need be determined by the percentage of students in a district eligible for the federal school lunch program. The FCC is expected to approve those recommendations in May 1997.

Many TOPC members have expressed particular concern that a subscription-based approach, while encouraging use of the network, does not contain any disincentives for over-use of the available capacity. However, where rates are tied to capacity provided to the individual user, the problem of overuse bears primarily on the local networks of the individual institutions and not on the shared backbone. The K-20 network backbone is designed to meet the initial capacity demands from the local networks. Where local networks seek to increase capacity, any necessary increases in the backbone capacity could be done at the same time. The TOPC recommends that the issue of local network over-use be left to the administrators of the local networks. The Legislature should instruct institutions to establish policies to prevent the inefficient use of local networks and infrastructure.

What the fund covers

The internal service fund would be used to cover recurring costs -- transport, node maintenance and operations, node-site equipment depreciation and network administration -- and replacement costs of the shared K-20 assets.

The fund would not cover costs of the maintenance and operations of local networks or on-premises equipment. Ownership of on-premises portions of the network would continue to rest with the individual entities on which the facilities are located. Local school districts and institutions should not look to the K-20 network fund as a source of funding for local networks or on-premises infrastructure.

The rate-setting process

The rate-setting process would be similar to that used for other internal service funds. Cost projections would be provided to the network users as part of the biennial budget process. Any significant savings would be identified early in the process so that scarce resources could be reallocated to other areas of educational need.

Proposed rates could be established based on standard units derived from an assessment of service needs, service measurements, and utilization estimates. Rates are normally determined for a period of at least one biennium.

Proposed rates would be reviewed by the K-20 network participants, DIS and OFM. Upon approval, rate schedules for the biennium would be published and distributed to network users for budgetary planning.

Resources to operate the backbone network would come from individual agency appropriations, local school revenues, grants, endowments, or other funding sources available to them.

Internal service fund capitalization

To assess utilization and promote development of the network, this funding model proposes that the internal service fund be capitalized for a time certain. Two options were presented to the Committee:

• requesting state general fund appropriations to capitalize the internal service fund for two biennia, deferring agency charges to establish a fee structure that fairly reflects participation.
• directing that the internal service fund be capitalized, using dollars from the 1996 $42.3 million K-20 appropriation, in an amount equal to two or more years' estimated network transport and related expenses.

Some TOPC members and others have suggested that the capitalization reflect shorter or longer periods, ranging from one year to three or four biennia.

There is general agreement that sufficient capitalization of the internal service fund is important to the success of the network. First, it recognizes that there is immediate demand for network services. Capitalization means that those needing immediate access will not face delays due to the timing of budget cycles. Second, the immediate utilization of the network provides information needed to set internal service fund rates for future biennia. Third, by providing start-up funding, the TOPC encourages schools to use the K-20 network as intended by the legislation.

K-12 and Higher Education proposal to exclude transport from the revolving fund

Representatives of public K-12 and higher education proposed at the January 9, 1997, TOPC meeting that phase one and phase two transport costs be excluded from the internal service fund fee schedules for the duration of the initial transport contract. The concern expressed was that including these costs potentially discourages urban participants from joining the K-20 network. In addition, including initial transport costs in the internal service fund might make school and library users ineligible for federal funds under the federal Telecommunications Act. The proposal stated these initial transport costs be funded through current or future appropriations.

In subsequent staff-level discussions, the K-12 and higher education representatives agreed that while these concerns were important, they were not inconsistent with the original proposal to include transport costs within the scope of the revolving fund.

First, the standard units for transport costs have not been determined. While there was some concern that the standard unit must be based solely on bandwidth, it is understood that the standard unit could be based on a number of factors, such as distance and student population. In any event, under this proposal the standard unit would be developed by the network administrator in consultation with network users and OFM. Moreover, because of the price advantages of the state leveraging its purchasing power for the K-20 network, the TOPC is reasonably assured that K-20 backbone network services will be priced below comparable services offered by private companies to individual institutions, regardless of whether those institutions are located in urban or rural areas.

Second, TOPC does not anticipate that the funding mechanism proposed will jeopardize universal service subsidy eligibility for public schools and libraries. As noted above, the Federal Communications Commission has not yet determined universal service subsidy eligibility criteria for schools and libraries; its decision will be released in May 1997. However, the initial recommendations by the Federal State Joint Board would not render ineligible those schools and libraries which share networks with non-eligible entities. They specifically include within the subsidy transport costs of local and shared networks, internal wiring, hubs, routers, network file servers, and wireless LANs. Moreover, in the event that the final FCC ruling mandates new eligibility criteria, those involved in the rate-setting process can adjust their processes to ensure that schools and libraries receive the maximum available under the Telecommunications Act.

Co-pay requirement

Several TOPC members have also suggested that capitalization should not be used to cover 100 percent of network transport and related expenses, but should cover an amount less than 100 percent. Like a health insurance co-pay, a requirement that institutions commit their own funds to cover at least a portion of their use of the network immediately will provide a necessary incentive to institutions to use the network efficiently.

Funding local networks

Under this funding model, the K-20 educational telecommunications network does not extend to the building, operation or maintenance of local networks or on-premises infrastructure of the individual institutions.

There are strong policy reasons and precedents for placing funding responsibility for on-premises infrastructure with the individual institutions. First, where telecommunications services are provided by the state yet no local planning has been undertaken, the state's investments may not be used efficiently, and costs for ongoing maintenance and operations would not be adequately covered. By contrast, where each entity is responsible for obtaining and maintaining its own local equipment, its acquisition of information technology is based at the outset on a determination about where technology fits with its mission and its prioritized use of limited resources.

Second, where entities look to the state to provide on-premises equipment and services, they lack incentives to seek efficiencies in their information technology procurements.

Third, where equipment is used primarily by a single agency, it is not efficient to assign responsibilities for maintenance, inventory, and upgrade to another entity which may be unfamiliar with the agency's particular mission. Central state management of equipment which is not widely shared would require significant resources of personnel, money, and technical skill, since it would require management of many different pieces of equipment located at hundreds of locations throughout the state.

Finally, individual educational entities historically have owned their own on-premises infrastructure and taken responsibility for its maintenance and operations. In many cases, where this existing equipment is augmented with new equipment for which the state assumes on-premises management and operations responsibilities, the state will have established duplicative maintenance and operations for local equipment. Such a dual system would create confusion among end-users as to the responsible party for maintenance and operations of a particular piece of hardware.

Local responsibility does not mean that the state abandons its role in coordinating on-premises infrastructure. The ISB currently has oversight responsibility of non-backbone information technologies to ensure (1) that the local infrastructure is compatible with the state network through technical standards, (2) that IT acquisitions by various agencies are non-duplicative and make best use of the state's volume purchasing power, and (3) that the construction and performance of large technology projects avoid undue delays and cost overruns. This oversight would continue.

Recommendations