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Here’s What Happens to the Billions of Dollars in 911 Fees Phone Users Pay

A legal crusade that could potentially recover hundreds of millions of dollars for local emergency responder systems around the country got started 10 years ago purely by accident.

Roger Schneider, an IT specialist who ran a small Internet company in Huntsville, Ala., received a visit from a BellSouth sales rep who was angling to get his business. The sales rep reviewed Schneider’s phone bill and noticed that the business was paying a federal tax that backed the 911 emergency calling system on all 22 of its lines – totaling more than $100 per month.

“We can get that down to five lines,” Schneider recalls the rep saying.

What that rep didn’t know was that Schneider happened to be a member of the oversight board for Huntsville and Madison county’s 911 system. So he knew firsthand how the county struggled to raise enough money to keep the system—which dispatched police, fire, and ambulances in emergency situations—running and up to date.

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“It was sort of like the fox showing me he had the keys to the henhouse,” Schneider tells Fortune. “I almost felt I had to make a citizen’s arrest.”

A little digging by Schneider uncovered evidence that BellSouth, now part of AT&T, and other local telecommunications carriers commonly helped businesses pay less by reducing their 911 taxes. The county ended up negotiating settlements with local carriers worth a few million dollars in back payments of the tax.

Schneider, 58, realized that the issue was much more widespread. A recent telephone industry count found cases in various stages pending in Alabama, Georgia, Illinois, Massachusetts, Minnesota, Pennsylvania, Rhode Island, Tennessee, and the District of Columbia. Schneider is involved in one way or another in most, as the Wall Street Journal reported recently.

Big Shortfalls

Although the 911 tax is based in federal legislation, each state is given wide leeway on how to impose the fees. Some states further delegate down to the county level to set the rates and rules for the tax. Fees can range from 20 cents per line per month in Arizona to $5 per line in some Illinois counties.

The amounts collected often don’t cover the full cost of providing 911 service, according to the most recent annual report on the system by the Federal Communications Commission. States reported spending a total of $3.1 billion in 2014 for some 196 million emergency calls, according to the agency’s most recent statistics, which include some extrapolated estimates and no data at all for 10 states such as Nebraska and Tennessee. But states collected only $2.5 billion from 911 fees, the FCC said, making up the deficits with grants, other taxes, or general fund revenues.

The reasons for the shortfalls vary widely. At one extreme, the state of New Jersey raised $120 million in 911 fees, but redirected 89% of the funds to help patch up the state’s general budget, saying the money offset law enforcement and public safety expenditures. Other states, like New York and Rhode Island, reported transferring substantial amounts to their general budget funds. Overall, about 9% of the fees collected nationwide were not spent directly on 911 costs, the FCC report said.

Some experts who have looked at the system and the current funding mechanism suggest the real problem isn’t carriers avoiding collecting all the fees. Even if fully collected, they say, the fees wouldn’t provide enough money for critically important, nationwide technological upgrades that the emergency dispatching systems need.

“The people who developed the funding models that were originally put in place could not have foreseen what would be required or what would even be possible in 2016 and beyond,” says Bernie O’Donnell, director of communications services for Connecticut’s Department of Administrative Services, who worked on a national report about 911 reform. “It’s time for many to take a fresh look at funding models and administration of funding.”

Until that happens, however, most 911 systems still depend on the fees. The controversial practice Schneider stumbled upon has it roots in the digital transformation of the telephone system. Instead of getting individual phone lines for each phone number, most businesses now depend on digital connections that can each provide service for about two dozen or more phone numbers.

The carriers say in many states, they’re allowed to charge one 911 fee for the single digital line, regardless of how many phone numbers are involved. And they deny they’ve done anything wrong, with many pointing to state or local rules that were never rewritten to address collecting fees on the digital lines.

AT&T (T) calls the lawsuits “baseless” in a statement, adding that “under state law, we are simply an intermediary that collects surcharges and turns them over to E911 providers.”

Verizon Communications (VZ) declined to comment on the litigation, but also pointed to the laws requiring the collection of the fees. “We’re collecting the tax in compliance with the law,” a spokesman said.

CenturyLink (CTL), another carrier mentioned by Schneider as settling in Alabama, declined to comment.

A New Firm

Eventually, Schneider’s obsession with helping local governments recover past 911 fees become a business. He opened a new firm, Phone Recovery Systems, in 2012 dedicated to analyzing 911 fee situations and assisting in recovery lawsuits. The firm has helped local governments sue on their own, such a $41 million lawsuit filed last year against 19 carriers filed by Delaware County, Pennsylvania, and eight lawsuits in January filed by Cobb and Gwinnett counties in Georgia filed seeking over $50 million. The firm has used whistleblower laws to file its own lawsuits around the country, including one seeking $214 million in Massachusetts and another for $29 million in the District of Columbia.

The legal rulings so far have been a conflicted hodgepodge. This year, a state court in Pennsylvania made an initial ruling in favor of Schneider and Allegheny County, Penn. But lower courts in Massachusetts and the District of Columbia have ruled in favor of the carriers and dismissed cases. A federal appeals court in Ohio is scheduled to hear oral arguments in the Tennessee case next month. Carriers had prevailed in having the lawsuits dismissed by a lower court.

Schneider, who is involved in many of the pending cases though not in Tennessee, remains upbeat. “The statutes are a little different in every state,” he says. “But in nine out of 10 cases, we see very serious wrongdoing.”

Still, the cases could years to wind their way through the courts. Legislators around the country might do better to follow the advice of 911 reformers and look for other ways to fund the system.