Rethinking ESA Policy Design

Mike McShane: Hello, and welcome back to another edition of EdChoice Chats. This is Mike McShane, Director of National Research at EdChoice. And on the line today, we have Katherine Bathgate, who is an advisor with EdChoice and the CEO and founder of SchoolForward, which is a firm dedicated to advancing education reform in the United States.

Now, Katherine has authored a great new paper that we’ve published at EdChoice titled Rethinking ESA Policy Design, a New Approach to Financial Accountability. And that’s what we’re going to be talking about today. So Katherine, it’s great to have you on the podcast.

Katherine Bathgate: Hey, thanks for having me. I’m excited to talk about this.

Mike McShane: So where did the idea for this paper come from? I’m not trying to like undersell it, but a new approach to financial accountability, not necessarily something that everyone kind of rattles off off the top of their head. So where did you get the idea for this paper?

Katherine Bathgate: Yeah, it’s a, I definitely have crossed the bridge into the nerdy camp of ESA policy at this point. Like there’s just almost no going back.

Mike McShane: Well, you’re welcome. I can be a one man welcoming committee here, you’re welcome.

Katherine Bathgate: A lot of people have been there before. Yeah. I mean, I started out in communications, really.

And just as I’ve as I’ve done more of this work, it’s sort of evolved into me caring a lot about the policy because I have seen how much it impacts the experience of families and how much it impacts what we’re fighting for. And I feel like if this movement, right, the school choice movement is going to put so much, right, millions, hundreds of millions of dollars of donor money and advocacy and like all of this effort, right, policymakers, you know, taking bold stances to pass choice, we ought to get it right. We ought to actually care about how it functions and make sure it functions well for people.

So I was at an EdChoice Yes.Every. Kid convening about two years ago, after we’d passed a lot of ESAs in a lot of states, right, we started thinking, okay, how do we get implementation right? And we were talking through some of the challenges. And it dawned on me during that convening as I’m sitting there listening to different people present and talk about, you know, pitfalls and what to be wary of, that part of the underlying issue we have in how we have so far structured ESA policy is that we have approached it almost with more of like a regulatory approach or saying like, this is how it should be.

So we’re going to legislate it this way, or we’re going to put our RFP out this way to get the right vendor to run it a certain way. What happens in all of that is that almost in all instances, ESA policy is designed and pointing back to the state. So it’s reliant upon the strength of the law, rather than a more free market approach, which relies on aligning the incentives properly, so that digital wallet companies who are providing the service of sort of all the transaction items on the ESA side are really first and foremost serving the customer.

Right now, their contract is with the state. Same thing. So that’s kind of where I’ll start.

It was like looking at the vendor model and looking at some of the challenges we had in like customer service, transaction costs, turnaround times, things like that. So you start thinking, okay, well, how can we make this better? Well, if they were competing for, you know, parents to enroll and you choose their platform, the table, the game changes really quickly.

And you don’t wind up having, you know, everything be beholden to the state. And what does the state want? It actually becomes much more about what does the parent want and how do we meet and serve their needs.

So that was kind of the first iteration of this. And then as I started looking even more, and I’ve just spent a lot of time listening to ESA parents, seeing what issues are coming up in all these Facebook groups where they talk to one another about some of the challenges, I started to realize, you know what, we’re making families jump through a whole bunch of hoops to access ESA dollars. And my understanding and I think many of our understanding is that is not how these programs were intended to be, right?

We didn’t want to create this big bureaucracy. But what has happened is rather than getting access to those funds, maybe we’ll spend them the way that best fits your child’s needs without jumping through a bunch of hoops. We have basically, without saying it, but in our actions told parents, you’re guilty until proven innocent.

So here’s your ESA dollars. We want you to pick the school or the educational environment that’s right for your kid. But before you go and spend a dime, you’ve got to run a bias, right?

You’ve got to ask us for permission. You got to get pre-approval or you’ve got to use our closed marketplace with our select vendors, right? Or you’ve got to, or you can take a chance.

You can go out and spend your own money and wait for reimbursement. It’s not guaranteed that reimbursement will come. And the other thing that you wind up have happening is families wind up waiting sometimes 30 days or more, and in some instances, several months, actually.

One state that’s happening right now. And what’s really concerning about that is we’ve, we honestly have reports of families taking out high interest credit cards to like cover the gap in getting reimbursed. So it’s, I don’t want to put down the ESA programs as a whole, because I think by and large families are using them.

They’re happy to be using them. And there’s a lot of good stuff going on. But as a school choice community, as we continue to advance ESAs, hopefully see them expand into other states, I think we need to pause, look at how we do this better so that it’s better aligned for families and so that their experience is better.

And we still, you know, have the kind of mechanisms to make sure there’s no waste, fraud and abuse in place. So that’s where I came from. It was really just, you know, a bit of a philosophical approach, being a free person who believes in free market, but also just a very pragmatic of seeing what was happening on the ground and some of the pain points and thinking, oh, we can use a free market approach to solve these issues.

And that’s where this came from.

Mike McShane: Yeah, it’s funny you bring up the Facebook groups and others. I feel like I shouldn’t necessarily give this away, but I’ve gotten good like research material or at least like kind of sparking some ideas to look into from perusing both the Facebook and the Reddit groups that parents in various ESA states have. And there’s actually been more than one occasion in which I’ve been speaking with people from states or vendors or others that are in there.

And they tell me one story and I’m like, you know, it’s interesting, because if you go on the Facebook group right now, there’s like a couple dozen people having pretty detailed discussions, which makes me think that they’re not making this up of some like serious pain points with the process. So it’s actually, again, since you’re joining us at the indoor kids table, it’s actually a really interesting place to get information about how these programs are working or where they aren’t.

Katherine Bathgate: Yeah. And I will say, I never share anyone directly, I just want to be clear, I never share anyone’s information directly or even their like, you know, personal story directly, I would never do that. But it is helpful to see in a conversational way where the frustration points and really kind of where different threads take off, right?

Like, oh, I’m having an issue with that too. And then I am too, I am too, I am too, and then you start to say, okay, this might be a larger pain point. And that’s where a lot of that plus actual one-on-one conversations and just talking to other people in the space, but it’s a value.

And I think it’s not something that we should exploit, right? Like, we need to be really careful, like we are on the side of these parents, we want them to have a great experience. But as people who are more close to the policy design work, right, and get to have influence over that, we should be listening to parents more, we should be taking what their challenges are and trying to figure out if we can make things a little bit better.

How can we tweak it? How can we fix that pain point? How can we make it so that they’re like, this program is awesome, and I would recommend it to anybody.

That’s what we’re, that’s what we’re going for. So I think it’s a good place to just better understand what we’re doing with and the space that we are working in.

Mike McShane: And you’d hope that like the policy conversation is roughly aligned with the user conversation that’s taking place. And it’s like, well, if all the people who are talking about policy are talking about a completely different set of issues, and it’s like, this is the stuff that matters. It’s like, is it?

I don’t know if it necessarily is because the people that are actually using this say it’s A, B, and C, and you’re saying it’s X, Y, and Z. So I’m probably going to tend towards the people that are actually doing this every day. And if they’re saying that A, B, and C are the problems, those might be the ones that we want to move to the front of the queue.

So you write in your paper, in an attempt to mitigate the risk or perception of fraud and misuse in ESA programs, lawmakers and regulators have implemented all sorts of rules and limitations. Though well-intended, these efforts have led to a system of regulatory whack-a-mole, where each time ESA dollars are used on an expense lawmakers or administrators find suspect, a new law or rule is born. Do you have some examples of this, so that maybe listeners can understand what’s happening here?

Katherine Bathgate: Yeah. Yeah. So there’s two things happening, right?

One is sort of the regulatory approach. So the example I give in the paper, which is a hypothetical, is that of baking soda. And so I would say, look, I can buy baking soda and use it with my son to conduct a science experiment, right?

Maybe we’re doing the volcano explosion and we’re learning about that, right?

Mike McShane: A key part of childhood schooling is vinegar and baking soda, papier-mâché, you got to do it.

Katherine Bathgate: So they’re doing that in public school, right? They’re doing that in district schools. This is not, you know, a controversial thing.

Seems like a pretty legitimate expense. But as you know, baking soda has, what, hundreds of uses. They market the product as such.

And I could also use it to clean my house. And so if I choose to buy baking soda, the purchase is the exact same. The use case matters.

So this becomes a real big regulatory problem, because in a lot of cases, the regulators or program managers who are running these things have to decide what to do about baking soda, right? Are they going to categorically approve baking soda or are they going to categorically deny baking soda? Now, if they choose to approve it, right, they run the risk of people using it for other means, right?

Unless you have some sort of mechanism to audit and be like, hey, Katherine, do you have a picture of yourself doing that science experiment? Like did your son write a paper about the volcano experiment? Like what, you know, what can you show?

Was there a worksheet? Was there something that showed your kid was doing something educational with that baking soda? If they deny the baking soda, right, especially if they deny it categorically and say, look, no one in our state can buy baking soda anymore with their ESA dollars.

What winds up happening over time, so take the baking soda, multiply it by 100 other decisions just like that, winds up happening over time is the freedom and flexibility of ESAs shrinks, right? Everything becomes kind of in a box, right? And so you want to do something different.

Let’s say your kid wants to launch model rockets, right? And like somebody decides that’s too recreational, right? Maybe your kid wants to be, you know, super passionate about physics, right?

And that’s something you want to study with them slowly, slowly, slowly, right? It will shrink the freedom, flexibility and customization of the programs. And that’s kind of the whole point of ESAs.

It’s not a typical voucher. The idea is you can do something different that really is unique and fits your kids. So that’s a hypothetical example.

Real life examples. I will start with my home state of Utah. Utah lawmakers heard that people were using some of their ESA dollars on season theater tickets to a performing arts center.

They did not like that. They did not like that people were using money on ski passes and rentals. Now, for anyone outside of Utah or maybe in Colorado, you may be like, ski passes?

That seems extravagant. You can actually do that in a very affordable way. Like there is a mom in Utah who wrote in the Facebook group, my son has never wanted to do PE.

And you know, we tried this out because we had ESA dollars for the first time. We spent like a couple hundred bucks. Wasn’t extravagant, right?

We got discount passes, cheap rental, you know what I mean, like they were really thoughtful about it. He’s falling in love with it. We can’t do this anymore.

They’ve now banned. They’ve now banned this. So things like that, trampolines are really controversial.

Some people say those are totally recreational. Other parents, especially those with kids who have certain special needs will say, look, my kid needs like a 15 minute bounce break every two hours. Otherwise, we can’t get school done.

This is like actually helpful to their functioning as a student. And so those those kinds of things become controversial. And so in Utah, they actually did pass an updated law that banned these kinds of things, right?

Like flat out. So that’s that’s one of the examples of things that we’ve seen. There have been some attempts in other states.

The other thing that we’re seeing, like in Arizona, that I talk about a little bit in the paper is, you know, hey, every time you want to purchase something, you have to justify it right with curriculum. And so now you have this is again, this is like the guilty till proven innocent thing. You now have parents who are going on ChatGPT and having to like write curriculum with AI.

Now they’ve they’ve they’re smart. They figured out a great workaround. So like go parents there.

They will there. Gosh, parents are so ingenious when it comes to this kind of stuff. But an extra step of having to show that Utah, a lot of the stuff they’re not saying has to align with state standard.

Well, that’s not really the point of the ESA program, but that’s where we are now. So parents are having to say like this math game that I want to purchase, if it doesn’t align with Utah state standard, you know, they can’t find a way to justify it. They may not get that.

So that’s where that’s where these things are starting to get really tricky. And what I what I fear is over time, the freedom will diminish. And we’ve seen this in other areas of choice.

We’ve seen this in the charter school movement, starting out with lots of freedom and flexibility, more and more regulation year after year, making that a harder and harder space to operate. I don’t want to see parents in that boat of having more and more regulation put on them the way that the way the charter schools have gone through over the last 20 years.

Mike McShane: So this is the thing that’s interesting. It’s worth sort of lingering on for a moment. It’s not necessarily in your paper, but I think part of it when we have this broader discussion about like financial accountability and what does it mean for an ESA program or a school or anybody to be sort of financially accountable.

And the thing that I keep coming back to is like the examples that you just gave. So people get upset when we when someone buys ski tickets or ski passes or like you said, season tickets to the theater or whatever. No one to me seems to be saying, well, wait a second.

Or we hear people’s responses. Well, you know, public schools do things like that as well. And there’s this interesting kind of issue in that we can’t actually say that a public school district in Utah did that, like bought tickets to the theater or whatever, because we don’t have like transaction level details of every penny that was spent in the public schools, which we do in ESA programs, which to me is like the very tools that people are using to argue or the weapons that they’re using to argue that ESA programs are not financially accountable are the like insane levels of transparency that these programs have, like transaction level, like I don’t know of any other place that’s doing that.

But like so in Utah, is that available to policymakers? Is that available to like the average person from like a freedom of information request? But they have transaction level details for every penny that was spent in that ESA program.

Am I correct in thinking that?

Katherine Bathgate: Yes. That’s wild. And that’s the case in most states, right?

I’d have to look at every single law to confirm that it’s a hundred percent. But generally speaking, that is how it’s set up because it is a approve before purchase. So even, you know what I mean?

So all those are coming in. They’re seeing all of that. The other thing that’s really frustrating about this, I was remembering another example, there was a kid in Arizona, a family who tried to buy a cello, very controversial, spending money on cello.

It was expensive cello. At the same time, what really bothers me about examples like that is you have no idea what that kid’s situation is. Now, if you’re trying to buy a super expensive cello for a kindergartner to try cello for the first time, like, yeah, that seems a little bit kind of crazy to me.

But what if that kid’s in ninth grade and they have their heart set on going to a Juilliard? And you know what I mean? And this ESA is what’s making it possible for their family to purchase a professional level instrument for that kid, right?

I was a musician. My parents made a huge sacrifice to buy me the oboe. Huge nerd.

Loved it though. And, you know, it was a big thing that I got to play and not just on like a crappy plastic instrument, you know, from the rental store, but I actually graduated after several years of lessons in band into something that was meaningful. I was really fortunate that my parents could do that.

And also it was a sacrifice for them to do that. Like it was an expensive instrument. It’s really cool for kids to be able to do those kinds of things.

And it’s astounding to me that we would like be like, oh my gosh, that kid’s learning cello. Like, oh, the horror. You know, it’s not spending it on Pokemon cards, we’re spending it on a musical instrument.

And theoretically the families made a decision that that is right for their kid. And that is the whole point of this. And so if we are going to actually trust families to make these decisions, we have to actually trust families to make decisions.

I get that that is scary because how I spend my ESA dollars is going to be different from how you spend your ESA dollars. I bet if we both were, you know, enrolled in doing the ESA program, we would probably make different choices or how we spend those dollars. I might not agree with some of the choices you make.

I don’t agree with some of the educational choices some of my peers make. Like my kids, I have my kids in a classical school. Not everybody believes in classical education.

But if we start limiting those options, and this is kind of the fringe of it, but like it starts at the fringe and then it works its way in. We have to be concerned about that. We’ve got to protect that.

I’m not advocating to spend ESA dollars on taking you and your spouse on a cruise. But for stuff that is truly for the benefit of your child’s education and development, we should be allowing those. And unfortunately, it feels like the fear of the cello in the news, right, the fear of the headline is driving things a lot more than the vast majority of parents who are saying, I want the freedom to spend this.

I know best what my kid needs. And we’ve pulled on this time and time again. That’s how parents feel.

They do not want the government deciding what is right for their child’s education.

Mike McShane: Well, and there’s something else that you wrote in the paper. And this is I hadn’t thought about this this way before. But it’s one of those things, like as soon as I read it, I was like, why hadn’t I thought of this before?

Because it was brilliant.

Katherine Bathgate: I’ve gotten that a lot.

Mike McShane: Yeah. So this is what you write. So you write in some ESA programs, parents are asking for moonshots.

So for assistance, expensive ski equipment, the cello would probably fall into this. So right.

Put a cello in your mind, folks. So parents are asking for moonshots, leading to program administrators anxiety and occasionally a negative media headline when an expenditure perceived as questionable is approved. This is this is the interesting bit that you put in here.

But why wouldn’t parents seek approval for these items? There’s no harm in asking if they’re denied. They’re no worse off.

And if the administrator approves the purchase, the parent prevails. And sort of later on, if we cobbled together some things, which is if a legislator or regulator later gets upset that ESA dollars went towards a moonshot purchase, the administrator gets a proverbial hand slap, not the parent. So the administrator’s incentive is to be conservative and risk averse, denying any education expenses that aren’t obvious.

And I think like so part of it is, I think the first point that you made, which is a great one, which is like, you know, parents asking to do this stuff is not the end of the world. Like, that’s OK. Like testing the sort of boundaries of it to understand, hey, I’m excited about this new program.

I’d like to try this. I’d like to try that. And then there’s some kind of dialogue back and forth of putting out the edges of what’s allowed and what isn’t.

That’s not the end of the world. But the point that you made later, which is that all of the incentives are basically aligned for that not to be like a productive dialogue of, you know, imagine the regulator, someone coming up and saying like, hey, you know, I read this this way. And it would seem to me that a cello would apply.

Can I? Would a cello work? And rather than sort of having the response of like, you know, we never thought about buying a cello.

But I don’t know if your kid’s going to be a musician. That makes sense. And public schools buy cellos all the time.

So sure, of course, that sort of productive. Their first thing is like, wait a second, if I let you buy this cello and that ends up on the news, I’m going to be in trouble, not you. So I think that that sort of conversation about incentives is a really important one.

Katherine Bathgate: I think what’s key about that, you know, the moonshot argument is that your point about like it doesn’t, you know, what’s the problem, right? This is not a bad thing for people to be asking in the context of how we’ve currently structured ESAs. Yes, I agree with that.

The issue is there’s two problems that are where you have misaligned incentives. Number one, the program manager, right? Whoever that is in your state, they’re incentivized to say no for two reasons.

One, they don’t want the bad headline. And two, they don’t want lawmakers coming after them. Who signs their check at the end of the day?

The state. The parents sign the check. The parents not paying the digital vendor, you know, the digital wallet provider or anything, right?

So who signs a check at the end of the day? They don’t want to let that stuff through. And in fact, we have instances where they’ve been like so conservative that like parents have gotten, you know, pretty upset about it.

And in one instance, I know of, the state actually like changed their digital wallet provider around that, right? Because parents, because it was so conservative, but they were trying to follow it to the letter of the law. You know what I mean?

But it wound up creating this kind of artificial, like unintended restriction that was tough. The other issue is that as a parent, I’m not when, when, and this is like in putting the card for us a little bit, because I know you want to talk about, you know, when we talk about kind of one of the policy remedies for this issue, right? But if, if I get $8,000 for an ESA, and I spend $2,000 of it on homeschool curriculum, and I’m kind of got my, got my core, right, done.

And now I’m trying to figure out what extracurriculars, am I paying for music lessons, et cetera, maybe my kids into sports, and there’s like a certain, you know, thing I want to kind of round out their experience with. I am incentivized to ask for like a $6,000 bike. Like, why would I not buy my fourth grader a $6,000 mountain bike?

Mike McShane: Because… You’re leaving money on the table if you don’t.

Katherine Bathgate: I’m leaving money on the table if I don’t, exactly. And so, and if, if the program manager, if the digital wallet provider, sometimes I’m using those interchangeably because it depends on the state structure. But if they say, whoever’s the decision maker, if they say yes to that, and later someone gets upset about it, they’re the ones that get in trouble for it.

No one’s coming after me as a parent and saying, Katherine, why did you purchase a bike that expensive? And part of that is just because I do not have any incentive to be conservative with my funds because I’m not able to, I’m leaving money on the table if I don’t. And so my incentive is actually to spend every single dollar every year in most of these situations.

And that creates, that creates a problem. It’s actually very, the underlying thing is this, every actor in this scenario is acting rationally. The parent is acting rationally.

They’re just acting in their best interest. That’s a rational thing to do, or their child’s best interest in this case. Same thing with the program manager or the digital wallet provider.

They’re acting rationally. They’re acting based on a set of incentives, the way the game is designed. The game is designed to disincentivize them because they could lose their contract.

They could lose millions of dollars in administrating, running the program, et cetera. So until we actually change those things, we are only left with what we talked about earlier, passing more rules and regulations to try and fix the behavior we don’t like in the way we want it to be. And I’m really nervous, as I’ve said before, I’m very nervous about that because I’m nervous about how much restriction that’s going to put in place.

Mike McShane: And that it’s also like a one-way ratchet, right? Like people tend to only add more things. There’s very rarely people come and say like…

Katherine Bathgate: Usually don’t roll them back. I mean, sometimes, there’s been a few things like Florida and other places have made some good changes, but not all, yeah. Yeah.

Mike McShane: Once everyone is like crushed under the tonnage of it, they have like a blue ribbon commission and get rid of things, but things have to get pretty bad before…

Katherine Bathgate: And it has to get pretty bad because it’s not even just a handful of parents complaining or being the squeaky wheel. It has to get bad enough that they’re just like everyone complaining. And it’s hard, right?

For people to do that, spend time and energy on that, et cetera. I mean, they will complain, but also they don’t really have a lot of recourse. Like your option, if you don’t like how the program is being run is kind of just to leave the program.

There is no other, there is no other alternative. There isn’t like an alternative program you can jump over to in these cases. So you’re kind of stuck.

It’s a take it or leave it. And they know that.

Mike McShane: Absolutely. So you sort of previewed your… We’ve spent a lot of time talking about the problems here, but you offer two sort of solutions to this that you refer to as the carrot and the stick.

So you say that the carrot is allow all ESA dollars to roll over and be used for future years and or eligible post-secondary expenses. So how do you see this helping the problem?

Katherine Bathgate: Yeah. So let’s go back to that bike example for a second, right? I’ve spent my $2,000-ish on my core curriculum and I’ve got $6,000 leftover.

In a non-rollover situation, I am incentivized to spend every dollar. Now if the state came to me and said, actually, Katherine, if you don’t spend any of that $6,000, it rolls over to future years use. And so your child’s ESA maybe grows a little bit, right?

Maybe you want to save some of those funds because high school costs more than fourth grade. And so you may want to actually have some of those more, some of those resources down the road. Or if you’re conservative with your funds, you may want to use some of that towards college or post-secondary expenses or career and technical training, right?

Whatever those opportunities are, depending on the route your child chooses. In that case, I’m probably not going to spend the $6,000 on the bike anymore. I’m probably going to like go for maybe, I mean, I don’t know, $6,000 is a crazy expensive bike, but I live in a place where people are really avid about their bikes.

They’re very expensive. But, you know, maybe I’ll sell for a $2,000 bike and then I can roll over $4,000. Suddenly my calculus changes because the incentives are different.

I have an incentive to actually be conservative with the funds. And not just that, I’m now viewing the funds as my child’s funds, not the state’s funds. These are funds the state has allocated for my child to use, but I get to direct them fully and so I’m concerned, right, that if we don’t do that, it’s going to continue to be this use it or lose it.

Now, there are a number of states that have rollover provisions to some degree, so I want to be clear about that. It is over a majority that have a rollover provision, but they most do not allow you to roll it over all the way into post-secondary expenses. And I believe that that is a game changer.

I think that it will help families understand that this is for the whole education of my child, right, age of 12, but also has the opportunity to help them beyond that. We all know how expensive higher ed is. Of course, college is expensive, but even career and technical programs can be expensive, right?

Certifications, things like that. And so having the ability to set your child up for success with that, assuming you’re meeting their core educational needs throughout their educational experience, I don’t know why we wouldn’t want to do that. I don’t know why we wouldn’t want to encourage people to be a little bit more conservative with their funds.

I think that’s a good thing. I think we want parents to be thinking of it as their own money because I think they will spend it more cautiously if it is.

Mike McShane: So that’s the carrot. You also bring up the stick, which says allow parents to spend ESA dollars without preapproval, but make them directly responsible for purchases instead of relying on administrators and vendors to be the judges and arbiters. So how would that work and how do you think that would help?

Katherine Bathgate: Yeah. So the key thing there is you’re shifting the response. First of all, you’re shifting the responsibility.

So like we talked about earlier, the responsibility has largely been on that of the program manager or the digital wallet. They’re on the hook for these expenses. I think we need to put parents in the driver’s seat.

Now this is a carrot stick. The stick is the negative side of this, but you’re talking about positive and negative reinforcement. The positive reinforcement is the carrot, spend the money how you want, all of that.

In exchange for that freedom, we’re going to say, look, if you are found to be misusing and abusing these funds that we have entrusted to you to manage on behalf of your child, there’s going to be consequences. Like you do not get to just like go do whatever the heck you want, take a kid to Disneyland with the funds. It needs to be educational.

But we’re going to give you the freedom to make those purchases and we’re going to give you the funds to be able to go out and do that without banging your head against the wall trying to get approval. So what I recommend is we actually make a policy change where parents actually have to, if they’re able to go spend, there’s a risk-based audit that happens at least on an annual basis. States could choose to do them more often based on their structure and how they want to do that.

They could do them in ongoing. They could flag transactions as they go if they wanted to. There’s like multiple ways you could set this up, but you’re kind of looking at probably a debit card model or a digital debit card model of some sort for this.

That’s just the mechanism. I’m kind of agnostic on how you do it, but you give them the funds to do it. They go out.

They spend the funds. And then on the back end, they might come to me and go, Katherine, we saw you charge baking soda on your debit card. Like what did you use that for?

Right. And I go, oh yeah, we did. We did the volcano science experiment.

Like here’s a photo. I snapped of it. Right. Or here’s a picture of a snap of the kids. I mean, however you want to validate it, right? This is if it gets called into question.

I’m not saying parents are going to have to do this for every single thing. But, you know, you’re kind of like documenting your kid’s education as you go and you might like have that ready to go. Or you have the receipt and you’re able to show here’s my receipt and here’s the curriculum that I bought, which says I needed the baking soda.

Like this is a science experiment out of my child’s fourth grade science book or whatever it is. If parents are found not to have complied, they’ve used their ESA card to go out on a date night to dinner or whatever. I think states should have a number of remedies.

And I think it should depend on the severity. So first and foremost, you’re paying back the funds because they weren’t supposed to use. So that seems like a pretty easy one.

That’s kind of the lowest remedy. You can layer on top of that fines. You could suspend the kid from the program.

You could expel them from the program indefinitely. And in really, really severe cases, because this is, by the way, already set up in most state laws, you could actually have criminal consequences for egregious, you know, things. And that would be, you know, up to the auditors to determine, you know, flag the issues, right?

And state this, by the way, this is appropriate mechanism for government to audit. It’s what government was supposed to do. So it’s putting them in the proper place in terms of their management or role in the ESA.

But they audit and if they find those things and they determine what the consequence is. You’ve probably got to have an appeals process in place of some sort. I think that would be prudent.

And then the last thing that’s critical to this, though, is that when a or family is accepting the ESA on behalf of their student, I think they need to go through some sort of like, you know, quick 10, 15 minute module online, something where they have to show that they understand, hey, if I misspend this, I’m on the hook. And here’s the consequences I might face. It’s a little bit of a fear thing, right?

Like, I don’t want to mess this up. So I’m going to be careful with what I spend. Or if I’m choosing to spend something that’s maybe a little more fringe, I know I’m taking on the risk that I’m going to have to pay it back, right?

And so they’re accepting that. That changes behavior. Now, why not just, you know, legislate all this to death?

Because we’re going to be legislating the ESAs to death for the next 20 years if we keep going down the road we’re on. And I think that’s problematic. So it actually, you know, you make the parent, you put them responsible and you have them sort of sign an affidavit.

The example, actually, that I’m pulling from, Utah has a very easy opt-out of vaccines. But if you want to opt out, you have to go through this module where you actually have to correctly answer multiple choice questions about, like, what happens if your kid gets the measles and stuff. And it’s not, it’s not, it’s not terrible.

Like, I’ve seen the module before, right? It’s like, takes 20 minutes or something. But you, like, actually go through it and they educate you.

And so, like, we can do the same thing for ESAs. Like, you set it up one time and you say, look, before accepting your funds, you have to go through this. Because in a lot of states, parents have to, like, sign an agreement, but nobody reads it.

So let’s just be honest. Let’s not design policy for, like, the what-if legal exceptions. Let’s actually design it for how people are interacting with and using things.

So you can create something simple like that to make sure parents are on board. You can set up a 1-800 number helpline. If parents have questions about expenses, they can call and talk it through with somebody.

There are ways you can do that. The other secret thing about all of this that I haven’t, that I didn’t call it explicitly in the paper, is this will save states money. It costs a lot of time and money to look at every single transaction for families.

It’s extremely expensive to do it that way. If you move to a risk-based audit approach, you’re going to save money overall on the administration of your program as well.

Mike McShane: Yeah. I mean, imagine if other sort of programs, I can’t imagine EBT cards or food stamps or any of those things. I assume is this done, is that done sort of risk-based as well?

Katherine Bathgate: A lot of those are done risk-based and families are able to go in and purchase. Now there’s some different, every program has different things about them. I would say the two that I call out in the paper that are, I think, worth looking at are health savings accounts.

So you have the option to go spend and if you are found to have spent your HSA on something that is not health-related, a qualified health-related expense, you’re in trouble with the IRS, essentially. They have that incentive baked into it and they’ve given people the freedom to go out and use that card. Same thing with FEMA disaster relief.

In a disaster, we don’t go, oh, well, please show me that your house actually was, you know, wiped away in the flood before I’m going to give you funds to go, like, purchase a hotel room. No, we give them the funds and we say, like, you need, you know what best, what you need in this situation, go take care of it. Now, if somebody’s found to have used, you know, stuff on, used the funds on something, there are processes in place to deal with that.

So there are other programs like this. In fact, I would say ESAs are almost the anomaly in that we require this guilty till proven innocent type of approach. It’s a mother mayhem.

We don’t require that in a lot of other programs. And I think there’s something we can learn from that. By the way, those programs are way, way, way, way, way larger, way more money too.

So I think to keep in mind.

Mike McShane: Yeah. So I have one last question for you that sort of prompted from reading your paper, but I’m interested to know what you think about this because especially you use the word accountability in your title and it’s something obviously that comes up a lot when we talk about ESA programs. So my question to you is, what do people get wrong when they talk about accountability in school choice programs?

Katherine Bathgate: Oh man, I’m going to take, so there’s two types of accountability that we’re usually talking about, right? Financial and academic. I’m going to, I’m going to take the academic question.

If you want to push me on the financial, we can go there. But we, the idea that we have true accountability anywhere in our K-12 public education system is laughable. And so I think that’s one of the things that we always say, oh, they’re accountable.

How so? There are probably thousands of schools that are like failure factories that do not do that. I’m not, I’m not bashing the entire public school system.

I will never hear me do that. There’s, there are many, many, many wonderful public schools, but there are public schools where kids continue year after year, decade after decade, generation after generation to not graduate, to not be reading at grade level, to not have, you know, the math skills that they need for a career. It’s a huge problem.

And yet we, we know that, and we don’t do anything. Accountability means actually taking action on something. What we have at best is transparency, at best.

Like we do not have actual accountability. I will now go to the financial side of this. Same thing.

When, when accountability means actually taking action on something. In the STIC model, you find somebody that spent the money wrong and take action. That actually is full on financial accountability.

Actually, in the way that we kind of have it set up right now, there isn’t really much financial accountability on parents. Right? Because we just talked about it.

It’s all at the program manager, digital wallet provider level. So we need to, we need to be a little bit more honest about what’s going on here. We need to actually acknowledge that we’re not going in and like shutting down schools that like spend their money in a wasteful way.

We’re not going in and shutting down schools that continue to graduate kids who can’t read and do math at grade level. We’re not. So that would be actual accountability.

If we took, when we saw a problem, we take action. We’re, we’re maybe flagging the problems. We’re maybe noted, noting the problems.

But that would be like saying an ESA is like, oh, we know that a whole bunch of people went out and went on Caribbean cruises with their family that were completely non-educational. They didn’t take their kids, let’s say. And we’re just going to like let them, we’re just going to let it be because we like, we audited it and we found that it happened.

That’s not accountability. That’s transparency. So I think we need to like, our word choice is really important on this.

And I think we’ve gotten kind of off on the wrong foot in saying that like we have actual accountability when we do testing or financial audits the way that we do currently. So feel free to push back on that, but that’s.

Mike McShane: No, no, it’s actually funny. I don’t know what, what brought this into my mind. I think before we started recording, we were talking about New Orleans and SPN is in New Orleans this year.

And just what you were saying just there reminded me of this kind of like lesser known character in American history. If you remember back to Hurricane Katrina, there was like the, yeah. It’s wild because I was in college when.

Katherine Bathgate: 20 years, this coming week. I don’t know.

Mike McShane: Very soon. Maybe that must, maybe it’s like been back in my social media and it’s one of those things like an algorithm is pushing on me and I don’t realize it’s there. But there was this guy named Russell Honore, the general, the lieutenant general, I think he was at the time.

And if you remember this guy, he was the one that like sort of FEMA was like a train wreck and everyone was stuck in the superdome and whatever. And he was this, I, uh, Louisiana born and bred himself. Army general who like comes in and a helicopter and I think Ray Nagin called them this like John Wayne dude.

And just like got everybody going. And he was, there’s that famous scene of him. Cause there was like people with the guns up and he’s like, this is a zero threat environment.

Put your guns down. We’re here to help people or whatever. And he got things going.

And the other thing that he was famous for was like a couple of weeks later, there was, was it Hurricane Rita? I think there was another hurricane that was like on the back end of it relatively quickly afterwards. And he was talking about all the preparations and getting the information out.

And a reporter was like, these reporters kept pressing him. Okay, well like, why are you doing this now? Why didn’t we do this for the last storm?

And he kept saying to them, you’re stuck on last storm problems. I’ve got this storm problems. You’re on last one problem.

And then he famously said, you’re all stuck on stupid, which is a great line, but a long way around the block to like, it seems to me so much of the conversation about accountability is like last storm problems that we have in our brains. When people talk about accountability, when you really talk to people and you’re like, you know, ostensibly people in kind of education reform. And you ask them like, what is accountability?

Well, it’s at the end of the day, it’s, we got to test these kids and we got to grade them, test them kids and grade them schools. Like that’s what they’re saying, right? And it’s like, and it may be ABCs or it’s maybe passing and failing and whatever.

Katherine Bathgate: I don’t have a problem with testing. I don’t have a problem with grading schools either. Like, fine.

Like let’s, let’s talk about how our schools are doing. We should, we have, I mean, it’s the largest line item in any state budget, right? Like we should be talking about how, how our schools are doing.

That’s absolutely important. So I’m not actually opposed to any of that. I just think we should maybe not say it’s accountability.

Because I don’t think it is accountable.

Mike McShane: If you’re not going to, if you’re not going to hold anybody accountable.

Katherine Bathgate: I, I’m like, I’m actually kind of on board with testing, right? Like I think some testing is good. I, I, kids take tests and adults take tests in life.

Like it’s actually part of our experience as humans in the economy and world structure that we’re in right now to have to take tests from time to time to prove your knowledge or competency in certain things. I’m not opposed to it, but pretending that that is sufficient to actually change things for the better and improve outcomes. I don’t, you know, not unless we’re actually going to go in and do something about it.

So, and I want people not to pay the pressure. There are some states that have gone to do something. There’s, there’s like recovery districts and turnaround initiatives and all that.

So I don’t want to like bash the entire model. I just think on the whole, we’re not fully getting what we say, because if we were actually finding a way to do that, we would see those scores improve because we’ve taken certain actions to do that. And it’s complicated.

I, I empathize with our friends who are working hard on those issues, but I. Sure. Yeah.

Mike McShane: But it’s. Well, and I think, look, one of the things that you kind of close your paper on, if I think back to general, general honorees, like this storm problem. So when it comes to ESA programs, like the actual issues, like you highlight that goods in closed marketplace costs more.

Approval windows are long. Reimbursements are slow. Customer service is poor.

Transaction costs are high. Like again, for people who act like advocates for these things are just like whistling as as whistling past the graveyard is as things are working. You’re very clear and transparent.

Like these are the actual thorny issues that are making these programs not work as well as they could not work as well as they could for parents, not work as well as they could for educational providers. And to me, like that’s if ultimately these things are going to be accountable to parents, if they’re going to be accountable to taxpayers, these are the kind of problems that we need to really be unpicking in order for these things actually work. Yeah.

Katherine Bathgate: And I think to be fair, I think people have been hesitant to have open conversations about the challenges in ESA because many states still don’t have an ESA program and we’ll see them pass one and we don’t want lawmakers to go, oh gosh. But I think, you know, I don’t want to touch that with a 10 foot pole. It’s got this list of issues.

But that is why it’s on us, I think, to start to think about. And I’m hoping the paper, I mean, I’m not saying that my paper is a silver bullet and I’m hoping it generates conversation around this, right? How do we address these underlying things and make the programs better?

Because number one, lawmakers are going to want solutions to these things at some point. So we need to be ready with them and ready with the option that is not ban everything and regulate the program to death so that like no one ever possibly does anything wrong. Right.

Because you’re kind of going to wind up with probably the equivalent like a private school voucher at that point. Right. You’re getting rid of all the unique customization.

And we know post-pandemic we are in a space with so much customization happening in education. We don’t want to quash that. But we have to actually come forward with some ideas and solutions and put them on the table for how we can address these things in ways that protect the freedom of these programs.

And that’s what I’m like trying to do with this. It is a little bit scary to come out there and say, hey, here’s some problems. But every time I’ve done it, people have been like, yep, we know we need to work on it.

So let’s talk about it and let’s not hide it under the cover from mom and serve it under the rug. Let’s say to lawmakers, yep, we know these are some of the challenges that you’re going to encounter when you pass an ESA program, but we’re thinking about it and we’re here to work with you and partner with you and figuring out ways to address it that still keeps the intent of what these programs are supposed to do, which is allow parents to make these free education choices that are right for their kid that can customize their child’s education experience in the way that will help them grow and thrive as much as possible. So it is interesting because we have tried to keep those things kind of quiet.

And I feel like in doing that, we’ve allowed some of the more regulatory responses to creep up instead of putting our ideas, free market ideas front and center in addressing these challenges.

Mike McShane: Well, Katherine Bathgate, thank you so much for joining us on the podcast today. As a reminder for everyone, the paper which is available on the EdChoice website is called Rethinking ESA Policy Design, A New Approach to Financial Accountability. So thanks for being on the podcast, Catherine.

Katherine Bathgate: Thanks for having me. It’s been great.

Mike McShane: Yeah. And thanks, everyone, for listening. As always, I think I’m supposed to the obligatory thing of like subscribing to things.

Wherever you’re listening to this, please subscribe. Give us high ratings. Even if you don’t really like it, it would just be doing a solid for somebody else today.

So I’d appreciate that. Thanks for listening. And I look forward to chatting with all of you again on the next episode of EdChoice Chats.