Arizona Task Force to Review Tax Credit Scholarship Program

Published October 29, 2009

A task force has been named by the Arizona legislature to investigate whether scholarship-granting organizations are playing by the rules or gaming the system. The task force will make recommendations for legislation to be considered next session.

A series of investigative reports published by the Arizona Republic and East Valley Tribune brought on the review.

The reports alleged the state’s school tuition organizations (STOs) have little or no oversight and several are failing to spend the required amounts of revenue on scholarships. Under the law, 90 percent of the money collected through the individual tax credit program must be distributed through scholarships.

There also are allegations of “swapping,” whereby children from affluent families receive public dollars to subsidize their private education.

“One concern is that donors are able to name scholarship recipients when they make their donations,” explained Lawrence Mohrweis, an accounting professor at Northern Arizona University who works with an STO in Flagstaff. “Some school tuition organizations allow recommendations, whereas others do not.

“Another concern,” Mohrweis continued, “is that scholarships are going to wealthy families. Arizona does not have an income eligibility test, sometimes referred to as a means test. In other words, wealthy families can qualify for private tuition scholarships.”

Seeking Info

State Rep. Rick Murphy (R-Glendale), chairman of the House Ways and Means Committee, said the reports have made a good program vulnerable to its opponents.

“Some individual instances have been reported that might be characterized as ‘abuse’ of the individual scholarship tax credit program or ‘gaming the system,'” Murphy said. “The local news has reported the story as if those practices are common. ‘Solutions’ have been suggested, many by opponents of the program and school choice in general, which assume there is widespread abuse in the program.

“I doubt those practices are widespread, but our investigation will help us determine to what extent any improper administration of the tax credit or scholarships is occurring and what remedies are appropriate,” Murphy added.

Deciding on Reforms

The task force met for the first time on October 14.

“The individual scholarship tax credit task force will meet three times this fall,” Murphy said. The first meeting established an overview of the program.

“We will be asking each STO for answers to specific questions and some specific tax credit and scholarship data,” Murphy explained. “Specifically, we hope to be able to identify how many of the scholarships and how much of the tax credit donations are used to assist students and families with financial need.

“The second meeting,” Murphy continued, “will mostly entail analysis of the resulting data and brainstorm how that information should impact proposed reforms. The final meeting will be to synthesize the proposals, discuss specific proposed reforms, take public testimony, and adopt formal recommendations for specific legislative changes to the program or its oversight.”

Policing Selves

The School Choice Working Group, a coalition of school choice organizations throughout Arizona, will work with the legislative task force.

“Greater transparency of the system is needed,” said spokeswoman Sydney Hay. “There needs to be a requirement for more reporting on what percentage of the scholarships are going to children with financial need. The law requires that 90 percent of the revenue be spent on scholarships, but there is no auditing mechanism in the law. That needs to be added to the legislation, and those audits need to be made public.”

Matt Ladner, vice president of research at the Goldwater Institute, a research organization in Phoenix, agrees.

“Organizations receiving substantial revenues through this program should be audited. They should have been doing this themselves, but they haven’t,” Ladner said. “In order to provide greater transparency there needs to be a ‘sheriff’ who can take action when a group is failing to do the right thing.”

Good Program, Poor Law

Murphy said the tax credit programs are valuable and should be preserved.

“I’m hopeful that the task force will be able to focus on how to make the individual scholarship tax credit program work better, rather than whether it or school choice should exist at all,” Murphy said.

“I also hope,” Murphy continued, “the evidence will help distinguish between the vast majority of STOs that act in good faith and provide the majority of their scholarships to students and families with financial need, versus the few STOs that may be exploiting loopholes or simply be out of compliance with the rules.”

One thing the newspapers reported isn’t a “loophole,” however, said Hays: “If there is any swapping of tax credits, this must be stopped. There should be a clear ban on it.”

Mohrweis agreed.

“Nonprofit organizations that accept contributions with the understanding that donor-directed recommendations will be followed are providing quid pro quo functions,” Mohrweis explained. “The process of collecting contributions and the process of allocating scholarships should be independent of one another.”

Helping Poor, Saving Money

Ladner does not think the situation sets the school choice movement back. Instead, he said, “This is a chance to make the school choice movement even stronger in the state.”

Hays agrees.

“The stories in the paper give the impression that the scholarships are all going to wealthy families. What’s not being reported in the news here is that this scholarship program is extremely popular among low-income families,” Hays said. “It provides scholarships to approximately 28,000 children each year.

“Not only that, but it saves the state money, too,” Hays added. “The state was spending around $6,000 a year per child for public schools. These scholarships are generally around $1,700. That’s substantial savings.”

Sarah McIntosh ([email protected]) teaches constitutional law and American politics at Wichita State University in Kansas.