What Is the Universal Service Fund (USF)?

The Universal Service Fund (USF) is a system of subsidies, fees, and funding designed to increase access to telecommunications for everyone who lives in the United States. It is based on the idea of universal service contained in the Communications Act of 1934, that “all people in the United States shall have access to rapid, efficient, nationwide communications service with adequate facilities at reasonable charges.”

The fund was created in 1997 as part of the implementation of the Telecommunications Act of 1996, and it is overseen by the Federal Communications Commission (FCC).

The USF is an important component of the U.S. telecommunications sector. This is partially because of the sheer size of the fund—the proposed allocated budget for the USF in Q4 2023 was $ 6.03 billion—but also because the fund impacts many different aspects of telecommunications infrastructure.

However, the USF has come under criticism as it is becoming increasingly difficult to fund because people are switching to IP-based alternatives that do not pay into the USF as telecommunication companies do. Revenue has shrunk from $72.3 billion in 2010 to $47.5 billion in 2019. As a result, this cost is being passed onto consumers via the telecom companies, which is unsustainable. There are proposed reforms that would help fund the shortfall.

How the Universal Service Fund (USF) Works

The origins of the USF can be traced back to the turn of the 20th century. The U.S. government was early to recognize that universal telecommunications across the nation would promote economic growth and national cohesion. Therefore, in the early 20th century, the government granted AT&T favored status in exchange for the company endeavoring to provide universal telecom access at a fair cost.

This system—essentially granting a company a monopoly in exchange for the promise of universal access—persisted until the 1980s, when then-President Ronald Reagan called for the sector to be deregulated.

The new system was codified in the Telecommunications Act of 1996, which represented a significant overhaul of the Communications Act of 1934. The 1996 act was designed to address the challenges of the new forms of digital communication that were then emerging.

The act mandated the creation of the USF. It also required telecommunications providers to contribute a percentage of their interstate and international end-user telecommunications revenues to the USF, which then would be used to achieve the aims of the act.

Most of the companies that pay into the USF, and most of the provisions of the act, relate to traditional telephone communications. This reflects the fact that access to telephony was seen as the most important telecommunications goal, even as late as 1997; however, in recent years, some have come to see the act as too limited in scope, largely because it doesn’t directly regulate the cost of broadband, which is now arguably the most important telecommunications technology for most citizens.

Components of the USF

The USF is made up of four programs: the Connect America Fund, the Low Income Support Mechanism, the Rural Health Care Support Mechanism, and the Schools and Libraries Support Mechanism (also known as E-Rate). Each of these components is dedicated to achieving a different aspect of the aims of the Telecommunications Act, but each relies on the funds administered through the USF. The components of the USF, in more detail, are:

• Connect America Fund: Also known as the universal service program for high-cost areas, this fund supports carrier companies so that people living in rural, remote, and higher-cost areas have access to modern communications networks. The program paid $4.17 billion in subsidies to telecommunications companies in 2022 for this purpose.
• Low Income Support Mechanism: According to the Telecommunications Act, this program “assists low-income customers by helping to pay for monthly telephone charges so that telephone service is more affordable.” This part of the USF was focused first on helping people to afford landlines, then cell phones, and now can be used to help pay for Internet access as well. It pays a maximum subsidy of $9.25 a month for Americans whose household incomes are below 135% of the federal poverty line.
• Rural Health Care Support Mechanism: This program “provides funding to eligible healthcare providers (HCPs) for telecommunications and broadband services necessary for the provision of healthcare.” Though a smaller component of the USF, this part of it makes a big difference for healthcare providers in rural parts of the country.
• Schools and Libraries Support Mechanism: Also known as the E-Rate program, this funding “provides telecommunication services (e.g., local and long-distance calling, both fixed and mobile, high-speed lines), Internet access, and internal connections (the equipment to deliver these services) to eligible schools and libraries.” Schools and libraries can apply to the fund, and the monies can then be used to provide 20% to 90% of the cost of telecommunications equipment and services.

As of 2018 (the most current figures), 42 states plus the District of Columbia also offer state-run support in addition to the existing funds from the federal government. Eight states, however, do not have any state funds: Alabama, Delaware, Florida, Hawaii, Massachusetts, New Jersey, Tennessee, and Virginia.

Future of the USF

Despite the relative success of the USF in providing schools, libraries, and rural healthcare services with telephone access, the USF has faced heavy criticism. This is because the fund doesn’t cover what some critics say is now the most important part of the average American’s telecommunications service: the payments that they make to their Internet service provider (ISP) for broadband.

Several arguments have been made in support of expanding broadband services under the USF. Some argue that the Telecommunications Act of 1996 already implies that broadband should be included because Section 254(b)(3) of the act states that “advanced services” should be accessible to all Americans. Others have pointed out that the cost of cell phone service has long been dropping for most Americans, while the cost of broadband has been rising over the same period. In light of these arguments, the FCC has looked into possibly adding broadband services to the USF and sought public comment on how to do this without undermining the fund’s ongoing stability.

The biggest telecommunications companies are not opposed to including broadband in the USF. Both Verizon and AT&T have signaled that they would support additional services being added to the existing remit of the USF. The FCC has already used some of the funds from the USF to promote the expansion of broadband into rural areas, albeit in a piecemeal way. In late October 2011, the FCC approved a six-year transfer of money from the USF into the then-newly established Connect America Fund (detailed above), with an annual budget of $4.5 billion. This fund is supporting the expansion of broadband services to areas that don’t yet have broadband access.

Things are slowly changing on other fronts as well. In 2016, the FCC voted to expand the Lifeline telephone subsidy for low-income Americans to include Internet access. This decision defines minimum service standards for broadband and mobile voice services, and it requires that Lifeline providers make available hotspot- and Wi-Fi-enabled devices when providing such devices for use with Lifeline-supported service.

The Bottom Line

The Universal Service Fund seeks to provide telecommunications services to all people living in the U.S., in a rapid, efficient, and affordable way. The fund has faced difficulties over the years, primarily funding shortfalls due to the way consumers access telecommunications. There have been proposals made and some adjustments; however, the fund will need more changes if it is to continue successfully.