Private school tax credits rife with abuse - East Valley Tribune: News

Rigged Privilege Private school tax credits rife with abuse

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Posted: Saturday, August 1, 2009 4:08 pm | Updated: 1:41 pm, Tue Dec 4, 2012.

Arizona's tax credit law, signed by Gov. Fife Symington in 1997, is touted as a tool to make private education more accessible to families who could not otherwise afford it. Instead, it has fostered a rigged system that keeps private education a privilege for the already privileged.

SPECIAL REPORT: RIGGED PRIVILEGE

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Only God and the health of loved ones rank higher with Beth and Doug Fitch than an elite education for their two boys.

The $20,000-a-year cost is exorbitant, Beth said, even though the Fitches are both personal injury attorneys and own an Ahwatukee Foothills home valued at a half-million dollars, Maricopa County property records show. But the Fitches haven't had to worry about the bill.

Arizona has paid the price.

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School tuition organizations unaccountable

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The state's Private School Tuition Tax Credits program covers the cost of private education, often for children whose parents could afford to pay it themselves - while allowing affluent families to reduce the amount of income tax they pay into the state's general fund.

To date, Arizona's main bank account has lost $350 million to private schools. The price tag is growing as the state grapples with the most serious financial crisis in its history, and people who depend on the general fund - public school children, the disabled, the poor and the sick - face severe cuts in services.

Under the program, taxpayers give money to nonprofit charities called school tuition organizations, or STOs for short. STOs give scholarships to children for private school tuition, and the state provides donors a dollar-for-dollar tax credit in exchange for their contribution.

The tax credit law, signed by Gov. Fife Symington in 1997, is touted as a tool to make private education more accessible to families who could not otherwise afford it.

Instead, it has fostered a rigged system that keeps private education a privilege for the already privileged.

The Tribune reviewed thousands of pages of state and federal tax records and analyzed private school enrollment data from the past 12 years.

Reporters interviewed dozens of parents, school administrators, school tuition organization executives, tax experts and government officials.

The newspaper's reporting provides the most complete account to date of whether tax credits have torn down the economic barriers that block underprivileged children from private classrooms, as lawmakers promised.

The Tribune investigation found:

* An untold number of STOs, schools and parents are using the tax credits in ways that violate federal tax laws governing charitable donations.

* Nearly two-thirds of all STOs failed to spend 90 percent of their donations on scholarships - as required by state law - since 2003, the year the STOs began filing annual reports with the state Department of Revenue.

* Executives at two of the largest STOs have used tax credit donations to enrich themselves, buying luxury cars, real estate and funding their own outside for-profit businesses.

* A majority of tax credit donations are earmarked to give scholarships to students already enrolled in private schools, no matter how much money their parents earn. Just seven of the state's 55 STOs use financial need as the primary factor in deciding who gets tuition money.

* Even as they took in millions of dollars in scholarships, the state's private schools hiked tuition dramatically, pushing the cost of private education further from the grasp of middle- and low-income families.

* Tax credits have failed to increase minority students' access to Arizona's private schools. Students at the schools receiving the most scholarship money remained overwhelmingly white at a time when the state's Hispanic population boomed.

Lawmakers promised tax credits would make private education available to all Arizona families.

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CAPTION

"Even the poorest child now becomes royalty in the system," Trent Franks, author of the private school tax credit law and now a U.S. congressman, wrote in a 1999 column in the Tribune. "In the past, only wealthy parents could afford their children such an opportunity."

His rhetoric never became reality.

Private schools grew slightly during the tax credit era, though there is little evidence the subsidies took significant numbers of students out of public schools and off the taxpayer rolls. Statewide, roughly 6,900 more students are educated in private classrooms than in 1996, compared with more than 280,000 additional students who entered public schools.

By design, Arizona's tuition tax credit program is unregulated. No state agency has the authority to prevent or penalize even the most brazen misconduct.

For instance, the state law specifically bars parents from donating to an STO and claiming a tax credit to pay their own child's tuition.

Yet schools and parents violate this prohibition with impunity, the Tribune has learned through numerous interviews with those who use tax credits.

Some schools give parents step-by-step instructions on how to game the system by lining up other donors for their child. One private kindergarten even pairs up parents to exchange tax credit donations - an illegal quid-pro-quo transaction under federal tax law.

The tax credits inherently benefit affluent families.

Research by the state revenue department found that tax credit donors typically earned upwards of $100,000 a year. Bare minimum, married couples with dependents - who make the majority of these donations - must earn at least $41,000 a year to take full advantage of a tax credit, now capped at $500 for individual taxpayers and $1,000 for married couples filing jointly.

Because most donors contribute for specific students, even some tax credit supporters question whether the system as a whole expands access to private classrooms.

STOs need to "search their souls," said Clint Bolick, board chairman of the Arizona School Choice Trust, a scholarship charity that focuses donations on low-income students.

Bolick, also a constitutional law expert at the Goldwater Institute, argues the tax credits are intended to benefit students who do not normally enroll in private schools. Too often, the income tax donations do not fulfill that mission.

In fact, despite the political promises, the tax credits were never equipped to do so.

"I support universal school choice," Bolick said. "And if we had a viable program to create it, I'd support it enthusiastically. This program was not designed to provide universal school choice."

SCHOLARSHIPS FOR FETUSES

It is the fetus who can benefit most from the state's private school tax credits, said ChamBria Henderson, founder and executive director of the Arizona Scholarship Fund (ASF).

"Some families know right from the moment of conception that this child is going to private school," she said.

ASF allows parents to bank away tens of thousands of dollars in tax credit donations for years - from the moment they conceive their child.

These donations go into each family's "K-12 Education Savings Account," according to its Web site.

Such accounts exponentially increase the power of tax credit scholarships by collecting money over a long period to pay for even the most expensive private education.

They also violate federal tax law.

Arizona statute requires that STOs be "501(c)3" nonprofit charities. The Internal Revenue Service bestows that designation on organizations it categorizes as worthy of tax exemption due to their public service.

Donations to these nonprofits are not supposed to be earmarked to benefit specific individuals.

ASF alone markets savings accounts for specific students. But the private school tax credit system is fraught as well with other activities that, at best, skirt federal law.

For instance, taxpayers are prohibited by state statute from taking an income tax credit for donations that benefit their own child. So parents recruit relatives, friends and others to donate to an STO to cover a share, or all, of their child's private school costs.

The scholarship charities that accept earmarked donations - which they term "recommendations" -  track how much specific students or schools have received in donations.

Executives at STOs that accept recommendations contend they are but one of several factors that determine which students receive scholarships and how much.

Rep. Steve Yarbrough, R-Chandler, executive director and co-founder of the Arizona Christian School Tuition Organization (ACSTO), said his charity has selection committees that consider scholarship applicants' tax filings along with letters explaining why a student merits financial aid.

However, Yarbrough said those committees also have lists showing how much in donations specific students have received on their behalf.

"That's one of the pieces of information they have," he said. "They are absolutely free to consider that or disregard that or do a combination."

But several parents who solicit private school tax credit donations told the Tribune that "recommendations" are far more than mere suggestions.

UNCHARITABLE GIVING

Working hard to solicit donations from family, friends and colleagues, Beth Fitch said she has managed to get her sons' entire tuition bill paid through scholarships for several years. Her oldest just finished eighth grade at Summit School of Ahwatukee in Phoenix; her youngest attends Desert Garden Montessori, where class sizes are kept in single digits.

"I understand that there is quite a dispute as to whether this is something that should continue in Arizona," Beth said of private school tax credits. But she feels justified in soliciting donors for her kids, even though she and her husband were paying the bill themselves before tapping into tax credits. "My two children would have fallen through the cracks at a public school."

Seven years ago, Paul and Pam Bosch decided their son, Graham, needed smaller class sizes and more individual attention than his public elementary school could provide.

Summit School was the right fit, Paul said, and the $6,000 a year in tuition was manageable on two college professors' salaries. Tax credit scholarships initially just lowered Graham's private school costs.

Then, in 2006, Summit rocketed its tuition to almost $10,000 a year. Rather than pull Graham from the school, Paul said they tried to get the increase covered with tax credit donations. The Bosches asked colleagues and friends at their church to donate on Graham's behalf.

Money began to roll into their account at the Arizona Scholarship Fund. Tuition "wasn't totally free at first, but then we got to a point where for us there was no cost," Paul said.

There was even money left over.

Paul knew last year that ASF had received more in donations for Graham than they needed to pay his tuition. But a family friend whose child also attended Summit was suddenly having financial trouble.

The solution was simple. Paul said he called ASF to request that whatever extra cash remained in their account be transferred to their friend's account with the scholarship charity. ASF made the transfer, he said.

Henderson confirmed that ASF used to allow families to shift money from one account to another, as though the charity were a bank. She said ASF ended that practice last year.

Such transactions raise doubts about whether STOs are actually engaged in charity work, which is a condition of their tax-exempt status.

"That doesn't work under federal law, that's for sure," said Bruce R. Hopkins, a tax attorney who runs the Non-Profit Law Center in Kansas City, Mo.

Tax credit donations earmarked with "recommendations" paid about half of the tuition for Margaret Borns' son to attend Seton Catholic High School in Chandler.

A number of family friends don't have children of their own, she said, and are willing to donate their income tax dollars for her family's private education costs.

Borns said her family can afford to pay Seton's tuition - nearly $8,000 a year for active Catholics. Tax credit scholarships allow her to make an additional donation to Seton with the money that would otherwise pay for her son to enroll.

Keri Griffith-Terry solicits donors by e-mail to help pay for her son to attend Grace Community Christian School in Tempe.

It is more comfortable for her to ask for money in writing, Griffith-Terry said, than in person, though she has heard that other families throw dinner parties to recruit income tax donors to pay for their children's private schooling.

Several STO executives said they know that parents organize to trade tax credit donations, a practice that violates federal tax law. Harry Miller, executive director of the Tuition Organization for Private Schools, said that when he sees a set of suspicious donations that look like a trade, he rejects them.

But the STOs overall do little to monitor their donors. Further, parents and schools sometimes even work around STOs, using donations to multiple scholarship charities to conceal the illegal exchanges.

"If somebody is going to cheat on their taxes, the STOs are not in the best position to police it, but they do their best," said Ellis Carter, a Phoenix attorney specializing in nonprofits who represents ASF.

Deceit by parents and schools aside, the state's largest STOs work extensively to ensure parents can direct income tax donations to their own children.

Henderson, ASF's executive director, acknowledged that STOs choose their wording carefully to describe their operations.

"We're using semantics to get around it," Henderson said of the federal tax law that prohibits scholarship charities from operating on earmarked donations.

"Recommendations" are allowed, she said. "Designations" are strictly forbidden.

In reality there is little difference between the two.

Federal tax code forbids tax-exempt charities, including STOs, from operating primarily "for the benefit of private interests."

STOs that allow specific student recommendations received more than $30 million in tax credit donations last year.

"If I were a lawyer advising these groups, this would be something I would be worried about," said John D. Colombo, a University of Illinois

law professor who specializes in tax-exempt organizations.

"I would be sweating at night over the private benefit issue."

WHITE OUT

Eleven Hispanic students attended Chandler's Valley Christian High School in 1996, the year before lawmakers created private school tax credits.

Minority students hardly registered at all at the religious campus, where 209 out of 224 students were white, according to figures the private school reported to the U.S. Department of Education.

Twelve years later, Valley Christian counted 10 Hispanics in its classrooms.

Tax credits were supposed to revolutionize school choice in Arizona.

Income tax donations would open private schools to the masses, supporters claimed.

The revolution never came.

Rather, tax credits appear to have stalled school choice.

A Tribune analysis of Arizona private school enrollment data, likely the first such examination here, found that the 20 schools receiving the most income tax money have been largely immune to demographic shifts taking place around them.

Hispanics comprised 15 percent of enrollment at these private schools in 1996. Their share remained unchanged in 2008.

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By comparison, Hispanics make up 42 percent of students in the state's public schools, up nearly 10 percentage points after a decade of massive Hispanic population growth in Arizona, data from the state Department of Education shows.

The top private schools were 80 percent white in 1996. White students continue to fill the vast majority of spots - 78.5 percent in 2008, a drop of less than 2 percent.

Private schools do not release information about their students' household income. The only marker to such demographic change on their campuses is through data documenting student ethnicity.

Private schools in the state have grown only slightly, about 6,900 students the past decade. Most of that expansion has come at new campuses that opened after the advent of private school tax credits.

Gilbert Christian Schools, formerly Surrey Garden Christian School, is one of these new campuses. Ninety-one percent of its students are white, enrollment data shows. In north Scottsdale, Notre Dame Catholic Preparatory opened in 2002 and now educates some 900 students, 87 percent of them white.

Some of tax credits' chief proponents agree that schools have used the infusion of millions of income tax dollars to increase tuition, rather than the diversity of their campuses.

"We have had some schools that have raised their tuition instead of adding more desks," said Henderson, the Arizona Scholarship Fund executive.

But even schools that added students, like Valley Christian, didn't necessarily add minorities.

Few schools receive as much tax credit scholarship money as the faith-based Chandler school. And its enrollment swelled by 87 percent from 1996 to 2008, the federal enrollment data shows.

But the 195 additional students who now attend Valley Christian are nearly all white, and white students account for 95.7 percent of the private school's enrollment.

Yarbrough, the state lawmaker and Arizona Christian School Tuition Organization executive, co-founded Valley Christian in 1981 to offer East Valley families an education grounded in their Christian faith.

Through the scholarship charity, Yarbrough has helped Valley Christian receive more than $1 million a year from tuition tax credits.

"It has been very, very important," Yarbrough said, "because there are a lot of kids at Valley Christian High School today who are doing great things, who will do great things in the future, who would not be able to be there but for the scholarship tax credit. Large numbers."

SERVING THE VULNERABLE

St. Mary's High School considers itself second to no private school. The Catholic campus competes directly with the state's most elite private schools - especially Brophy College Preparatory - in the classroom and, with particular intensity, on the football field.

St. Mary's is in downtown Phoenix, surrounded by some of the Valley's oldest and poorest neighborhoods.

It was a diverse campus even before private school tax credits began providing the school millions in new cash for financial aid. Hispanics filled 46 percent of its seats. Today, Hispanics make up a significant majority of St. Mary's students, 53 percent, just like the community around the school, data reported to the U.S. Education Department shows.

"For lots of different reasons, I think we here at St. Mary's have been able to serve greater Phoenix's population," said Rob Rogers, the school's assistant principal.

Just like its Catholic peer, Brophy, St. Mary's receives roughly a million dollars or more a year through tax credit scholarships. Brophy has made strides in diversifying its enrollment - Hispanics are about 15 percent of students, up from 8 percent in 1996, but that does not reflect their neighborhoods' diverse racial makeup.

The difference appears to be which STO is providing the scholarships. St. Mary's gets most of its scholarships through the STO operated by the Diocese of Phoenix. But Brophy receives a majority of its scholarships from an STO created specifically for the school.

Of the 20 private schools that receive the most tax credit money, three experienced the same Hispanic enrollment growth as the state's public schools, the Tribune analysis found.

St. Mary's, Bourgade Catholic High School in east Phoenix, and Salpointe Catholic High School in Tucson each saw their minority population increase substantially. And each received a significant majority of their tax credit scholarships from STOs affiliated directly with the Roman Catholic Dioceses of Phoenix and Tucson, according to state revenue department records.

The Phoenix diocese's scholarship charity, the state's second largest, has long permitted donations earmarked for specific schools. To ensure underprivileged families benefit, it hired an outside company to assess families' financial need before deciding which students receive scholarships and how much of a student's tuition the scholarship will pay.

That selection process funneled larger sums of money to schools like Bourgade and St. Mary's, where the financial need is greatest.

"I don't think there's any way they could go here if they had to pay full tuition," Rogers said of St. Mary's students and the high school's $8,000 tuition rate.

As the economy continues to shrink and shed jobs, a greater number of St. Mary's families need assistance, said Liz Hansen, St. Mary's finance director.

Now there is likely to be far less money available to help.

In a major reversal of its previous philosophy, the Phoenix diocese this year began accepting donations that explicitly "recommend" which student should receive a tax credit scholarship.

Paul Mulligan, executive director of the Phoenix diocese's STO, said the Catholic scholarship charity is permitting recommendations with some trepidation.

The change comes after the diocese's tax credit donations dropped roughly $1 million last year as Catholic school parents increasingly turned to organizations like the Arizona Christian School Tuition Organization to fund their children's private education through earmarked donations.

"People who don't like student recommendations have a stereotype that it's welfare for the rich," Mulligan said. "I think that's where people bring up a significant concern as to, 'Why is the Catholic church doing that?'"

Mulligan said the Phoenix diocese will spend a majority of the earmarked contribution for the students who donors intend their money to benefit. Then, the remaining dollars will go toward scholarships for low-income students.

The Phoenix diocese is closely monitoring its recommendation program to ensure that it doesn't just benefit affluent families. In six months, the STO plans to evaluate whether it has increased tuition scholarships for low- and middle-income students as well, Mulligan said.

If it has not, he added, the diocese will eliminate student recommendations.

"We want to tilt the scale to the families that need it," Mulligan said.

"We would never want to do something that ends up disfavoring the more vulnerable. The last thing we're going to do is create a system that takes people out of the game."

'NOT WHAT I FOUGHT FOR'

Arizona's tuition tax credits have been under legal attack from almost the moment they became law.

Their continued existence has depended more on courtroom victories, confirming the credits' constitutionality, than on political support.

Many of the early and most important rulings came through the work of attorney and school choice advocate Clint Bolick.

"I defended them up to the Arizona Supreme Court," said Bolick, of the Goldwater Institute, a Phoenix think tank that advocates for limited government.

In the 1990s, as Arizona tax credits blazed a new trail for the national school choice movement, Bolick co-founded the Institute for Justice in Washington D.C. to support such Libertarian endeavors.

A few years ago while searching for a kindergarten for his son, Bolick saw firsthand the rigged system that private school tax credits have become. He and his wife went to an orientation meeting at Community Montessori School.

Their son attended preschool at the tiny north Phoenix campus, which provides students almost one-on-one attention from teachers.

Another parent at the meeting groused aloud about the school's expensive tuition, Bolick said. Community Montessori's director acknowledged preschool tuition is high but added that kindergarten students enroll for free.

"And I'm thinking, 'Gee, that's interesting,'" Bolick recounted during an interview in June. He wondered if it was a public charter school

rather than a private school. Then the school director explained how income tax dollars pay for kindergarten tuition.

Community Montessori, the director told Bolick and the other parents, pairs up families to exchange tax credit donations to benefit each others' children.

"My jaw dropped and I thought, 'This is horrible,'" Bolick said. "This is not the program I fought for."

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