Scrutiny of state tuition tax charities grows

The state's tax credit charities, which provide scholarships to private school students, are finding themselves under heightened scrutiny, five weeks after the Tribune published an investigation that revealed widespread fraud and abuse.

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Some of those groups, known as school tuition organizations or STOs, have received letters from the Arizona Attorney General's Office regarding possible violations of the state law that requires them to spend at least 90 percent of donations on scholarships, several sources told the Tribune.

A legislative panel, established in response to the Tribune series, Rigged Privilege, is set to meet Sept. 21. The panel has already called for an investigation by the state attorney general and Internal Revenue Service.

And, the Catholic Tuition Organization of the Diocese of Phoenix, one of the state's largest STOs, has halted a plan that would have allowed donors to recommend specific students for scholarships.

Behind the scenes, several school choice proponents are working to craft their own proposals for legislative changes to the law, which allows individual taxpayers to donate up to $1,000 a year to a tuition organization which then gives out scholarships for students to attend private schools.

Matt Ladner, who oversees education issues at the Goldwater Institute, a Phoenix think tank, said his group has been pounding the idea of reform since 2003.

"I believe you will see a legislative effort to clean the bill up, to reform the legislation next year," he said.

The Tribune's investigation found that there is little state oversight of the charities that collect the tax credit funds. For instance, there are no rules regarding who can receive the scholarships, except that they cannot be given in the name of a donor's dependent.

Consequently, some tuition organizations have allowed donors to "recommend" their donation for specific students, regardless of the family's income. Some tax experts says such donations may violate IRS guidelines for 501(c3) charities.

The STO for the Phoenix diocese was one of about a dozen charities that gave scholarships based solely on financial need. Then this summer, it announced that it also would allow recommendations in order to boost declining donations.

Two weeks ago, the organization told schools it was suspending the recommendation program that began July 1, said Paula Osterday, an administrator with Chandler's Seton Catholic High School.

While the Arizona law doesn't specify whether donors can be recommended, the one clear provision of the law says that the organizations must give out 90 percent of their donations in scholarships.

Georganna Meyer, the chief economist with the state Department of Revenue who receives the annual reports from the STOs, said she has heard from a handful of groups about the letter from the Attorney General's Office. Many were concerned about the "90 percent rule," she said.

But Meyer said there are no deadlines in statute regarding when that 90 percent must be distributed, so it's a difficult rule to enforce.

After a request from the Tribune for a copy of the letter, Attorney General's Office spokeswoman Anne Hilby said, "The matter is under review. Our office does not confirm or deny allegations into specific investigations."

"While the matter is under review, documents related to it are deemed confidential," she said.

Rep. David Schapira, D-Tempe, who will lead the legislative committee, said he has started contacting tax credit experts and STOs to see if they will attend the Sept. 21 meeting. He said he would not provide a guest list until the speakers are confirmed.

Schapira said there will be a second committee meeting where the public will be invited to give input. The date for that will be set at the completion of the Sept. 21 event at the Capitol.