California latest state to join federal program giving free cell phones to poor

California is becoming the latest state to participate in a federal program that gives away hundreds of millions of dollars of free cell phones with prepaid service to indigent and homeless residents.

After four years of navigating bureaucratic red tape, California recently hired a vendor to take on the job of offering the pre-paid cell phones to an estimated 4.6 million eligible residents. At an average cost of $100 per phone, the tab in the Golden State alone could eventually reach $460 million annually.

The funding comes from Lifeline Assistance, one of four federally mandated Universal Service Fund programs that provide landline, cellular and Internet service to the underprivileged.  A monthly fee collected from each paying telephone subscriber underwrites the cost for the cell phone vendor.

The programs have generated controversy and concerns on both sides of the political aisle as their costs have skyrocketed to $8.1 billion annually.  The Lifeline cell phone giveaway program alone has doubled in size the last four years to $1.75 billion annually.

Conservative Republicans have targeted Lifeline for its growing cost, while Democratic Sen. Claire McCaskill of Missouri warned of potential abuses in the program when she got a solicitation suggesting she was eligible for one of the free cell phones.

California, however, makes no apologies for jumping in and offering its poor free cell phones. The state already has been using state funds to provide hardline phones in the homes of 1.46 million needy residents. Now it is joining the federal wireless program.

"Both programs exist concurrently with the same eligibility requirements and enrollment procedures," said Andrew Kotch, information officer for the California Public Utility Commission, however, "...Service providers that offer the federal Lifeline (wireless only) discounts do not get state funding."

State officials declined to say whether applicants will be required to provide proof of legal residency, one of several concerns that program critics have raised.

The Universal Service Fund programs were created by the Federal Communications Commission back in 1980s during Ronald Reagan’s presidency. Their goal was to ensure poor households had access to home phones. The money that funds the program is technically not a tax, but rather a federally required service fee charged monthly to paying phone customers.  Today, the Universal Service Fund underwrites four different programs targeted at the needy:

• The High Cost Program supports telecommunications companies with customers in hard-to-serve, rural areas. The program is designed to enable them to offer services and rates that are comparable to those available in urban areas. In 2011, the program provided over $4.03 billion in support.

• The Lifeline Program enables carriers to offer discounted voice telephone, including cellular service, to eligible low-income consumers. In 2011, the program provided $1.75 billion in support.

• The Rural Health Care Program helps telecommunications companies offer discounted rates to rural health care providers. These discounts enable rural health care providers to obtain communications and Internet services at rates comparable to urban providers. In 2011, the program provided over $81.5 million in support.

• The Schools and Libraries Program, commonly known as E-rate, provides discounts to schools and libraries for telecommunications, telecommunications services, Internet access, internal connections, and basic maintenance of internal connections. In 2011, the program provided over $2.23 billion in support.  

Lifeline has generated the most controversy in recent years. It now helps 17 million households nationwide, more than doubling in the last four years with 10 million new beneficiaries.

Telephone providers give away free cell phones with monthly minutes prepaid by the federal Universal Service Fund fees. The telephone companies are permitted to recoup their costs by charging additional fees to their paying customers.

Four telephone providers are currently approved for Lifeline’s free cellular program, the largest being the Tracfone firm owned by Mexican telecom billionaire Carlos Slim, one of the world’s richest men.

Tracfone targets disadvantaged communities with advertising and door-to-door sales teams to advertise the free cell phone program, and has garnered 4 million Lifeline subscribers and $452 million from the Universal Service Fund program. That’s roughly double its nearest competitors, AT&T and Sprint, according to Lifeline’s own official figures.

Though late to the game, California could prove a massive expansion of the free cell phone program. Lifeline estimates that California landline customers dropped 43 percent in the last decade while cell phone subscriptions skyrocketed by 123 percent.

Last month, the California Public Utilities Commission awarded its "free" cell phone service to Assurance Wireless.  The program is expected to launch early next year, the company said.

"As Assurance Wireless has been approved to offer service in more states, we are proud to help more and more customers stay connected to potential employers, medical and childcare providers," said Grace Boehm, Assurance Wireless director of strategy and business planning.

Advocates for the homeless say the program will change the lives of those living on the streets and provide them a way to keep in touch with family members and potential employers.

"Access to cell service for Lifeline purposes is a game changer in terms of serving homeless and marginally housed San Franciscans," said Nima Eslamieh spokesperson for the San Francisco Mayor's office.  "We are changing our shelter access to allow reservations to be made through our 311 system instead of only having people waiting in long lines.  With this service we will be able to text individuals their shelter information and otherwise improve outcomes of case management, job seeking, and treatment, as examples."

In order to qualify for the new taxpayers funded cell phone program, applicants must meet annual income guidelines of $14,702 or less. Additionally, the program doesn't require the recipient to have an address to receive a service statement. They simply must show proof of federal assistance such as Medicaid or food stamps.

Potential free cell phones users will be asked to pay a $20 fee for the initial Virgin cell phone. However, Assurance Wireless says it will apply the $20 expense to any overage charges new users may incur. Included in the new government program are 250 minutes as well as 250 text messages per month.

"We're very excited," said Jayne Wallace, an Assurance Wireless spokeswoman. "In this day and age, having access to communications is not a luxury and having a cellphone can make a huge difference in the lives of many people. We know from experience this can make a big difference in people's lives."

While the free cell phone program may benefit low-income residents, the
Heritage Foundation, a conservative think tank in DC, believes the new entitlement program is ripe for fraud.

McCaskill, for instance, received a solicitation letter in 2011 telling her she was eligible for a free cell phone. The letter prompted the senator to inquire about the program. "I am troubled by the expansive potential for the program to be abused," she told the FCC.

Heritage's welfare expert, Robert Rector, also points out the program doesn't place reasonable checks and balances to remove individuals if their income increases and they are no longer eligible for the service.

"At the very least, policymakers should require greater monitoring of the program to prevent misuse," Rector said. "Furthermore, if the purpose of the cell phones is truly to give lower-income people more access to potential employers, participants should be required to account for their job search activities."