School tuition organizations unaccountable - East Valley Tribune: News

Rigged Privilege School tuition organizations unaccountable

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Posted: Saturday, August 1, 2009 4:10 pm | Updated: 12:27 pm, Tue Dec 4, 2012.

When it comes to policing Arizona charities, the long arm of the law is a paralyzed limb. The state's Private School Tuition Tax Credit program has made the regulatory paralysis especially obvious.

Special report: Rigged Privilege

Private school tax credits rife with abuse

When it comes to policing Arizona charities, the long arm of the law is a paralyzed limb.

The state's Private School Tuition Tax Credit program has made the regulatory paralysis especially obvious. Nonprofit charities control every part of the $55-million-a-year tax subsidy program, which converts donations of income tax dollars into tuition scholarships for private school students.

Special report: Rigged Privilege

Private school tax credits rife with abuse

A Tribune investigation of private school tax credits found the subsidies have largely failed to expand access to private education for low- and middle-income families, as lawmakers promised.

Instead, the state law created an industry of unaccountable middlemen -- school tuition organizations, or "STOs" for short.

A handful of these scholarship charities work exhaustively to provide financial aid for underprivileged students, and spend miniscule amounts on administration.

A majority of STOs, however, blatantly violate the few regulations that lawmakers included in the statute, state and federal tax records show.

Officially, these nonprofits report to the Arizona Department of Revenue and the Internal Revenue Service. But the state agency lacks the tools to detect even rampant misconduct.

And the IRS has shrunk its auditing force dramatically in recent years.

"In Arizona, unless the IRS is going to come out and audit them, which doesn't happen as often as people think, there's really no enforcement mechanism," said Ellis Carter, a Phoenix attorney who focuses her practice on nonprofits and represents Arizona Scholarship Fund, the third-largest STO.

The state law that governs private school tax credits has just two clear regulations - both of them unenforceable.

The first restriction forbids parents from taking a tax credit for a donation that paid tuition for their own child.

But parents can commit that brand of tax fraud with impunity because the state never learns which students receive tax credit scholarships.

Only STOs know which taxpayers make donations and which private school students benefit.

Scholarship charities provide the state with aggregate totals of donations received and tuition paid each year, but nothing else.

The Arizona Christian School Tuition Organization goes so far as to routinely shred its application materials after it cuts scholarship

checks each spring, said Steve Yarbrough, the STO's executive director.

Destroying the records protects families' private financial information, he said.

Without scholarship details, there is no evidence to prove the crime, said Georganna Meyer, the state revenue department's chief economist.

Meyer alone oversees Arizona's tax credits, a species of government subsidy of which private school tuition donations are by far the largest.

Over the private school credits' 12-year history, Meyer has tirelessly worked to track how the system operates, who benefits and whether scholarship charities follow the law, state tax records show.

She peppers STO executives with e-mails and phone calls when their financial statements are incomplete. Or when the charities write tuition checks to parents, not schools, raising concerns that the income tax dollars do not always fund private education.

"I fuss with them about that," Meyer said. "I've told them before, that the statute says the money goes ... for a child to go to a school."

She jokes that her title should read, "Queen of tax credits."

But the economist ultimately has no control over the private school tax credits and the STOs they fund.

And Meyer is unable to enforce even the state law's simplest provision.

Scholarship charities must use 90 percent of their income tax donations to pay for private school tuition. That limits how much the STOs can spend on themselves, at least theoretically.

During the past six years, nearly two-thirds of STOs spent less than 90 percent on scholarships, according to state tax records.

Most have improved in this area, but some fell short by a wide margin.

State records show the Children's Scholarship Network of Arizona hasn't spent any of the $47,000 it received in contributions for tuition. The White Mountain Tuition Support Foundation used only 61 percent of its $400,000 on scholarships.

Meyer said she has no way to penalize STOs for violating the 90 percent rule because state law doesn't specify how much time scholarship charities have to spend income tax donations.

"It goes back to the point that I've got, really, no authority over them," she said.

The state attorney general and auditor general consider nonprofit charities outside of their jurisdiction.

Widespread violation on the 90 percent rule is a symptom of problems with the state tax credit law itself.

"The STO statute is incredibly ambiguous," said Carter, the nonprofit attorney. "It really is horribly written."

Scholarship charity executives argue that the system works well as is. STOs police themselves, said Harry Miller, director of the Tuition Organization for Private Schools. Until last month, Miller was president of the STO industry group, the Arizona School Tuition Organization Association.

When particular "bad players" are operating inappropriately, other STO executives will advise the wayward nonprofits on how to reform. "The last thing we want is an STO that's out of compliance in any way," Miller said.

STOs also receive contributions for private school scholarships through a much smaller corporate tax credit program. Unlike the tax credits for individuals, the corporate program is tightly regulated, limiting donations and requiring that scholarships go to underprivileged students

who are transferring from public schools. Corporate donations account for less than a quarter of all income tax credit money.

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