What Is the Universal Service Fund?

Universal service is the principle that all Americans should have access to advanced communications services at just, reasonable, and affordable rates. It is grounded in the recognition that access to communications networks is essential to participate fully in society and the economy.

The United States has pursued universal service as a policy for nearly a century, establishing the Federal Communications Commission (FCC) in 1934, in part, to achieve that goal. Congress expanded and further codified that objective in the Telecommunications Act of 1996. Universal service programs have evolved with technology, shifting focus from wireline telephone service to mobile phone and broadband connectivity in the 21st century.

For most of the 20th century, universal service was achieved through an implicit cross-subsidy system, with companies expected to offer low-cost basic phone service to residential customers and make up the difference by charging higher rates for businesses and long distance service customers. However, the break-up of AT&T’s monopoly in the early 1980s and deregulation of the telecom industry rendered this system unsustainable.

In its place, the FCC and the telecom industry moved toward an explicit subsidy system, where the competing telephone networks that succeeded the AT&T monopoly paid fees through a Universal Service Fund to support low-cost phone service in high-cost-to-serve areas. In parallel the FCC established Lifeline and Link Up, which are connectivity support programs for low-income households. In 1996, Congress directed the FCC to expand its universal service policies to include schools, libraries, and rural health care providers.

Today the USF disburses approximately $8-to-9 billion each year to support programs and initiatives under its four main program areas (listed with their respective 2023 disbursement amounts):

• High-Cost Support Program | $4.3 Billion: established to support access to affordable phone service for consumers in rural, insular, and other high-cost-to-serve areas. Its portfolio of programs has been reshaped to focus on deployment of broadband infrastructure to areas lacking high-speed internet access (defined as at least 25/3 Mbps fixed broadband). These programs include the Connect America Fund (CAF) programs, the Rural Digital Opportunity Fund (RDOF), and 5G Fund for Rural America.
• Schools and Libraries Program (“E-Rate”) | $2.4 Billion: established to support affordable telecommunication services, and later expanded to include broadband access, for schools and libraries through service discounts ranging from 20% to 90% of costs based on need. Funding requests can cover connectivity initiatives (“category one”), which are prioritized, or equipment to distribute connectivity throughout schools and libraries, typically using Wi-Fi (“category two”). Recent initiatives have focused on addressing the “homework gap” that is created by students’ lack of internet access to complete assignments at home.
• Lifeline | $870 Million: established to keep low-income consumers connected by reducing the cost of phone service, and expanded over the years to cover mobile phone and broadband service. Lifeline provides a subsidy up to $9.25/month for broadband or bundled broadband-and-voice service (or $34.25/month for those in tribal areas.) The related Link Up program provides a one-time discount of up to $100 for activation or installation of service for those on qualifying Tribal lands.
• Rural Health Care (RHC) | $470 Million: provides funding for telecommunications and broadband services to qualifying rural health care providers through the Health Care Connect Fund, which offers a 65% discount on internet services, and the Telecommunications Program which subsidizes the difference between urban and rural rates for telecommunications services.

The USF is administered by the Universal Service Administrative Company (USAC)—an independent, not-for-profit corporation—under the direction of the FCC. The FCC releases annual monitoring reports that track contributions and disbursements.

The Fifth Circuit Court of Appeals has recently ruled that the current method of funding the USF is an unconstitutional delegation of the Congressional power to tax—casting a shadow of doubt over the program’s continued operation. This ruling took place despite three other Circuits previously determining that USF and its administration by USAC are constitutional and the Supreme Court declining to review those determinations. This split will likely need to be resolved by the Supreme Court, and future Congressional or FCC action may be required to preserve or reconstitute the USF.

The USF is funded by mandatory contributions from telecommunications providers (phone companies, mobile carriers, paging service companies, etc.). Each provider’s obligation to the fund is determined by a formula that centers interstate and international telephone revenue, which is a subset of their overall telecommunications revenue. However, this has represented an increasingly smaller fraction of their total revenue in recent years. As a result, this system has led to a growing difference between what the USF funds today (broadband connectivity) and how it’s paid for (from a subset of phone service revenue).

Approximately 82 percent of USF contributors pass on these costs to their customers, typically in the form of ‘USF Recovery’ fees on their bills.

The COVID-19 pandemic accelerated the country’s reliance on broadband to access work, education, healthcare, and government services, highlighting the importance of affordable, reliable high-speed internet as a universal service. One-time measures in response to the pandemic, which aimed to help get and keep Americans connected, demonstrate what a robust and impactful universal service program could accomplish:

• The Broadband Equity Access and Deployment (BEAD) program provides $42.5 billion for broadband deployment
• The Affordable Connectivity Program (ACP) provided a $30/month subsidy for fixed or mobile broadband connections for two years
• The Emergency Connectivity Fund funded devices and tools that enable remote learning for students

Recent USF reform efforts have focused on modernizing and expanding on the benefits of those programs. For example, the FCC authorized E-Rate funds for installing Wi-Fi connections on school buses and lending Wi-Fi hotspot devices to low-income students and library patrons lacking connectivity. At the same time a bipartisan and bicameral congressional Working Group is interested in making the ACP permanent and altering the USF revenue base to better reflect the modern communications industry. The right set of reforms will enable the USF to play a key role in achieving true universal service in the United States.