The East Valley Tribune recently completed a series about how School Tuition Organizations, which funnel money from tax credit eligible charitable contributions to students, might be violating the law. The Tribune’s Ryan Gabrielson will tell us more about his reports.
Ted Simons:
A published series on how S.T.O.s, school tuition organizations, might be violating the original purpose and the law. They are using them for scholarships to help kids attend private, often religious, schools. I'll talk to the reporter who worked on the series. First, here's what Congressman Trent Franks had to say about it.
Trent Franks:
The one point I think should be made -- and I hope this article, this investigative article will talk about the debate in the legislature. The original bill I wrote said these scholarships would go to children, and children could use them at schools of their parents' choice. The parents were the ones that decided which school to choose and the scholarship charity simply said we will scholarship this child. Once we do that, it's the parents' decision.
Ted Simons:
What's the change?
Trent Franks:
I think the legislature should go in and clarify what the original intent of the legislation was. There was an amendment in that original legislation that kind of confused a few things. I think it should be very simple, that most of the time those who have tax liability are the wealthier in our society. Most of the time those who cannot afford a school other than going to the free public school that costs twice as much on the average as private school, then we just simply want to empower those who don't have that option. Right now rich parents can send their kids to any school they want. The poor cannot. The original intent of this legislation -- and it has gone a long way towards this end -- was to encourage those wealthier in society to fund an alternative, and fund scholarships so that children that weren't doing well in their existing school, to be able to access something that would give them a better chance to walk on a higher road and a sunnier road of life.
Ted Simons:
Here now to talk more about the series on S.T.O.s is "East Valley Tribune" reporter, Ryan Gabrielson. On a past investigational series we have spoken. This investigation started with?
Ryan Gabrielson:
At a time when almost every part of the state government was shrinking, this program is talking about expanding, adding a new program when the voucher program for disabled kids and for -- was struck down by the courts. They started shifting the voucher program into a new tax credit with donations from corporations. It didn't start with me, it started with my partner on the project, Michelle Reece, and one of our editors, C.C. Todd.
Ted Simons:
So again, the State gives dollar for dollar tax credits for these donations to…
Ryan Gabrielson:
Officially the donations are to what are called school tuition organizations, S.T.O.s. They are scholarship charities. Under federal tax law they are 501(c) charities. When you make a donation that donation is supposed to be tax deductible and serve a charitable purpose. The original idea, and why the state law requires them to be 501(c) 3s, they were supposed to help a group of people who wouldn't normally have choice. The law is used in a very unusual way. It doesn't say that a parent can't designate money for their own kid. It doesn't say, can you designating for any kid? With that wide-open loophole the law is being used in a very different way from what Representative Franks originally talked about.
Ted Simons:
First, just in general, are tax credits making private school education more accessible?
Ryan Gabrielson:
There are individual cases, yes, some students. On the whole, global perspective, no, absolutely not. You can't get information on income level of families in private schools. They are private schools, they don't release that. The only thing we have available to access is -- they are more accessible than 12 years ago -- is racial demographics. They do report to the federal government every other year. What has happened with the schools that have received the most money, some of them received more than a million a year in tax credits. What happened to the enrollment at those schools? First off, did it grow? They didn't grow substantially. Did it change who's going to these schools? In 1996, the year before the tax credits, they were 80% white. Today they are 78.5% white.
Ted Simons:
That's the demographics. Are there more schools to choose from?
Ryan Gabrielson:
Not really, very few, a small handful of schools. Statewide, private schools make up about 50,000 of students everywhere. There's 1.1 million in public schools. The private schools have grown by about 5,000 to 6,000 students total. During the same time period, public schools grew by almost 300,000 kids. A small handful of schools opened up, like Notre Dame High School in Scottsdale, Surrey Garden in Gilbert. Those schools account for almost the entire growth of private schools, period. There wasn't a revolution that opened the gates of private school.
Ted Simons:
The intent was to get more access to private schools, and you're saying not necessarily. To get more private schools on the ground and open: not necessarily. To get more kids out of public schools and into private schools that want to go: not necessarily.
Ryan Gabrielson:
There's no evidence to support any claims of that.
Ted Simons:
How do parents and schools and S.T.O.s, how do they work their way around to what they are not supposed to be working their way around?
Ryan Gabrielson:
It's pretty simple. They change what they call things. Federal tax law forbids donations that are earmarked or designated to benefit one person. It's not charity if you're giving money to help one person. If you're giving money to a charity to disburse, that's charity. Instead of calling these earmarks or designated donations, they call them recommendations. We found from actually going out and talking to parents and schools and reading the surprisingly blunt details that schools publish on their own websites, describing how the program works, they aren't recommendations. They are designations. That will allow them to be within what the law allows. The state law doesn't even address it.
Ted Simons:
I was going to ask about oversight. You're saying no state oversight?
Ryan Gabrielson:
There is no actual regulation of the system by the State. The State Department of Revenue has one person, the chief economist, Georgianna Meyer, who oversees the program, in that she receives annual reports about donations and scholarships, each S.T.O. the State gave out. She's not required -- able to get any other information about who gets scholarships, who is making donations and that sort of thing. She doesn't have the mechanisms to catch blatant, out-of-control law-breaking. Which is what we've actually found. It's become the norm in many cases.
Ted Simons:
For those who aren't familiar with S.T.O.s and what they are, they are kind of a conduit, correct?
Ryan Gabrielson:
They are middlemen. When the state law passed, it required classified nonprofit charities to basically handle the money. You just -- can't just make a donation directly to a private school because that gets into problems with the state constitution anyhow. The state income tax donation can be converted into a tuition payment.
Ted Simons:
They are converting these payments, according to your report -- we should mention, not every school is doing this.
Ryan Gabrielson:
No.
Ted Simons:
But some of the largest are. They were converting for individual designated students. Is this true -- let's say my kid, I can't recommend for my kid, but I can get you to do it.
Ryan Gabrielson:
Yeah. Casual quid pro quo exchanges, illegal under federal tax law, are the norm. Some parents are going to great lengths to create highly complex Webs of tax credit trading, sometimes using multiple school tuition organizations, making it virtually impossible to catch. Sometimes it's, I'll do one for your kid, you do one for mine. Grandmas, grandpas, uncles, aunts, donating income tax, instead using that money to go to pay for Timmy's private school education.
Ted Simons:
We're talking $300,000 some-odd in the program.
Ryan Gabrielson:
Over the life of the program it's been about 350 million dollars. It's grown to be about a 50 million dollar a year program.
Ted Simons:
The S.T.O.s, could they not say, this is like blaming the IRS for tax cheats. We can't keep these people from doing things. Why blame us if parents, teachers, schools, wind up going around the law?
Ryan Gabrielson:
That's the argument they make. They can't necessarily stop the illegal transactions. That's true. They can stop the illegal transactions they themselves are undertaking. It's the same system as any other designation; they just came up with a wording change. That's their doing.
Ted Simons:
What kind of response so far are you getting? What are you hearing from the S.T.O.s, and what are you hearing from lawmakers?
Ryan Gabrielson:
Surprisingly positive, actually. The State House Representatives formed a task force, mostly Democrats but with a few Republicans, as well, that are going to look at changes in the state law. There are certainly instances where low-income kids benefit, but they are not typical, we found. We talked with dozens and dozens and dozens of people in this system. Standard operating procedure is parents with means are the ones who benefit most.
Ted Simons:
But you will hear critics say anything that offers a parent or parents' choice is something that should be considered positive. Granted, some folks are working around the lines here. But these kids are getting the education their parents think they need.
Ryan Gabrielson:
Well, it's almost a different debate. This law was passed and there was some language put into it to suggest that it's not supposed to be just a rebate for people saving the state money. They are trying to specifically put in there, saying you can't designate your own dependent. This wasn't supposed to be a rebate program for parents. That's a different debate and a different subject. If the state legislature wants to pass that, you won't hear a peep from the "East Valley Tribune."
Ted Simons:
Is there any sense that tuition, since the start of this program, one of the intents was to drop tuition costs? Are costs dropping?
Ryan Gabrielson:
If you can raise enough income tax credits, yes, but no. The schools that received the most money had doubled their tuition in the past decade at a rate well beyond inflation or normal cost increases. It works a lot like every time federal government increases financial aid for poor college kids, almost every university in the country ups the tuition. There's a new set of resources to funnel money in. Every single time the state legislature increased what parents and taxpayers could give, tuition shot up for schools that just a few years ago cost $6,000 a year, they now cost $10,000 a year.
Ted Simons:
Is there any self-policing going on from here, now that the information is out?
Ryan Gabrielson:
We haven't heard anything -- the S.T.O. industry hasn't spoken to us in a uniform way. Some of them have said, we think there is need for reform. There are a lot of players in the S.T.O. industry who feel there needs to be a major reform for a number of years. 18 They are losing out on donations because people of means are designating for people they know.
Ted Simons:
Great work. And thank you again for joining us tonight on "Horizon." we appreciate that.
Ryan Gabrielson:
Thank you.
Ryan Gabrielson:East Valley Tribune;
