After six years, ESA program still vexed by financial accountability
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After six years, ESA program still vexed by financial accountability

Closeup Of Calculator, Hand, Pen And Financial Statement. Photo Courtesy Dave Dugdale From Superior, USA

The Arizona Department of Education is credited with taking several steps to provide financial accountability for the state education funds provided to parents who opt their student out of public schools, but a state audit says that’s not quite enough.

Since the program’s inception, $99.7 million has been provided on personal debit cards for education related expenses through Arizona’s Empowerment Scholarship Accounts. About 4,102 students currently receive ESAs, and bills before Arizona’s House and Senate would expand the program to all students by 2020.

After six years, ESA program still vexed by financial accountability AZEdNewsESAFinancialAccountabilityInfographic480

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Despite the improved scrutiny ESAs are receiving, examples of abuse continue to surface, like a parent who used the money she received from the state – money specifically earmarked for the education of her child – to purchase a big screen TV.

“It’s probably one of the more difficult situations to have accountability in, because very few programs are structured like this where the recipient is given a debit card and they can only use the debit card for things approved by the ESA program,” said Chuck Essigs, director of governmental relations for Arizona Association of School Business Officials.

Every time a parent uses that debit card, someone needs to look at that purchase to determine if it’s appropriate and allowed under the program and that’s very labor intensive, Essigs said.

“We’re talking about millions of dollars in transactions. You have thousands of people charging hundreds of things,” Essigs said. “I think the (Arizona) Department of Education, considering how difficult it is, has done an admirable job, but I do think they’re understaffed and they haven’t been given the money to implement the technology that’s probably needed.”

On a recent episode of Arizona Horizon, Superintendent of Public Instruction Diane Douglas talked to host Ted Simons about the lack of funding in Governor Doug Ducey’s budget for data systems used by the Arizona Department of Education. The department asked for $17.6 million to update an outdated system and create a new one that supports payments to public schools.

“Unlike any other state agency, we have no money in our baseline budget to run the computer systems for the Department of Education, which runs basically every system education-related throughout the state,” Douglas said on Arizona Horizon.

Challenges to financial accountability

What made ESA spending abuses possible?

All the records for the ESA program were paper-based from its inception in 2011 until this past year, when the Arizona Department of Education’s IT group created and implemented a computer-based system to assist staff in analyzing parents’ ESA fund spending.

For example, questions asked about who used ESAs and the amounts they spent for what services for an AZEdNews article on ESAs three years ago took more than three weeks of analysis because the information had not been gathered from the paper documents before and the information was not in a database or spreadsheet format.

Related articles

Part 1: What are Arizona’s Empowerment Scholarship Accounts?

Part 2: Academic accountability: How do ESAs measure up?

ESA supporters say the misuse of ESA funds is relatively rare, but the examples of abuse reported in the media have led to changes in how the program is managed and proposed revisions to the laws.

The Auditor General’s Office noted that ADE has worked with the Treasurer’s Office and Bank of America to automatically deny potentially inappropriate purchases. Specifically, national credit card companies have developed a system that assigns a merchant category code to merchants based on the type of goods or services the merchant provides.

For example, grocery stores or supermarkets are assigned a specific MCC while a private school is assigned a different MCC, the Auditor General’s Office stated in its findings last year.

Arizona Horizon video: Arizona Department of Education IT Funding, Empowerment Scholarships

The conservative American Legislative Exchange Council’s draft of the “The Education Savings Account Act,” on which Arizona’s program is based, included numerous financial accountability standards, yet, legislation passed in Arizona to create ESAs included just some of them.

Auditor, legislators propose improvements

 As concerns  have mounted over the financial accountability of the ESA program, legislation was introduced this session that would give program administration, including financial management and accountability to private sector money managers.

Senate Bill 1281 introduced last month by Arizona State Rep. Steve Smith, R-District 11, would let the Arizona Department of Education contract with private financial management firms to process applications, determine eligibility, administer financial transactions, and approve eligible expenses.

The Arizona Department of Education currently provides those services and collects 5 percent from each ESA to administer the program.

Should Arizonans be concerned about a private financial company managing taxpayer money in the ESA program?

“These are public dollars and the oversight for public dollars ought to remain in the public sector,” Essigs said. “There’s nothing wrong with contracting out, but obviously the company that would get that award wants to make a profit, where the Arizona Department of Education doesn’t have to make a profit –  they just have to make sure the dollars are being spend appropriately.”

While the Auditor General recognized that the Arizona Department of Education has “established processes to distribute and oversee the spending of program monies, and it has prevented and identified some misspending of these monies,” it recommended in its report that ADE efforts should include:

  • Strengthening its spending review process, such as continuing to develop a risk-based approach for prioritizing its spending reviews and using all available tools to detect misspending.
  • Completing its development and implementation of policies and procedures to strengthen its enforcement and recovery actions.
  • Improving its overall administration and oversight of program spending, such as continuing to take steps to provide supervisory review of department staff’s work.

In addition, the Auditor General called on the Legislature to consider establishing a work group to determine if statutory changes are needed to further ensure appropriate spending of program monies.

Senate Bill 1281 would also create an ESA review council made up of parents of ESA recipients, education chairs of the House and Senate, the Arizona Superintendent of Public Instruction and other members who make recommendations to the Arizona Department of Education and the Legislature, approve the financial companies to administer ESAs, and submit an annual report to the governor.

But the bill would also allow parents to put $2,000 from a student’s ESA into a Coverdell education savings account to pay for a student’s post-secondary education. Students without disabilities usually receive about $5,000 a year, much less than tuition at most Arizona private schools.

Under the ESA program, parents whose child is accepted into the program receive 90 percent of the state funding that child would receive if they attended a charter school. The money can be spent on a variety of things, including tuition and fees at a private school, an online learning program, educational therapies or services and tutoring.

Initially designed for children with special needs, lawmakers expanded the program to include children of an active duty military parent or guardian; children placed in foster care who have been adopted; children who attend a public school with a state grade of D or F; siblings of students who are participating or have participated in ESAs; children who reside on Native American lands; and children of military personnel killed in the line of duty.

Opinions differ on oversight required

Jonathan Butcher, education director for The Goldwater Institute, said he is satisfied that Arizona tax dollars that fund the ESA program are being spent wisely and appropriately.

“These accounts allow parents to meet the unique needs of their unique children,” Butcher said. “Every parent should have the chance to do this — to give their child what they know their child needs. Research finds that some parents are choosing multiple learning opportunities simultaneously, exactly what the accounts were designed to allow for.”

He said that in the first few years of the program “parents were still learning how to use the (credit) cards and some misuse was unintentional for what the parents thought were approved educational expenses.”

He added that: “I know that (unintentional misspending) is not always the case currently because there are so many families in the program.”

Butcher said the accounts are audited every fiscal quarter before the next disbursement is made.

“If there is a problem, the next disbursement is withheld until the situation is resolved (if it is not referred to the attorney general) to prevent any future misspending by that parent,” Butcher said. “There is also an annual auditing process required by law.”

Not everyone is satisfied with ESA spending. Rep. Reginald Bolding, D-Laveen, said he doesn’t think accountability measures in place are as strong as they need to be.

“I’m not a fan of ESA, how it exists now,” Bolding said. “I don’t believe we have the oversight that we need.”

Bolding questioned whether ADE is effective in stopping fraud and abuse.

“We’ve heard of cases where people were able to buy TVs and gym memberships, things of that nature,” Bolding said.

Recommended changes implemented

Stefan Swiat, spokesman for the Arizona Department of Education, said in an email to AZEdNews that the department has taken several steps to increase oversight with its ESA program.

“First, the ESA department’s staff has doubled in the past year to eight full-time employees. This allows the department to more-efficiently manage the program,” Swiat said.

A computer-based system has been implemented in the past year to help staff identify risk-based expenditures and the automated system immediately identifies possible cases of fraud. Another IT system tracks emails and productivity. An oversight system requires both a specialist and a supervisor to examine all applications, and expense reports are randomly assigned to staff members for review.

ADE’s new online application system that began in fiscal 2016, lets the department produce real-time statistics such as application counts, types and grade levels.

“The new online expense reporting system was implemented during the FY17 school year,” Swiat said. “Since all expenses reported will be online, we will now have the ability to produce real-time statistics on the types of expenses ESA Account Holders are using the funds for. With the launch of the online expense reporting system, the department has implemented the auditor-recommended risk-based monitoring of all expenses reported by ESA account holders.”

“I think as a general rule, the expenditure of public dollars is better served when it’s under the control of a public entity,” Essigs said. “The main goal ought to be making sure that the public can trust how those dollars are being spent.”