In this episode of our Choice in the States series, Director of Policy Jason Bedrick chats with Jonathan Butcher from The Heritage Foundation. They discuss the history of Arizona’s tax-credit and ESA programs, how ESAs work in the state, and more.
Jason Bedrick: Hello, and welcome to another edition of EdChoice Chats. I’m Jason Bedrick , director of policy at EdChoice. And today I’m joined by Jonathan Butcher, the senior education analyst at The Heritage Foundation and a former Senior Fellow at the Goldwater Institute.
And today we’re going to be talking about education policy in Arizona in particular, Arizona’s pioneering tax-credit scholarship program and education savings account program. Jonathan, thank you so much for coming on.
Jonathan Butcher: Great to be with you.
Jason Bedrick: You lived in Arizona for a long time, although now I understand you’re on the East Coast. But you were there for the enactment of some of these pioneering programs. What can you tell us about Arizona’s tax-credit scholarship Program and how it was enacted?
Jonathan Butcher: Arizona was the first state to enact a tax-credit scholarship back in the late 90s. They were the first to really take on a new approach to providing children the chance to choose a private school when their local school or assigned school wasn’t a great fit.
Arizona over the years has really developed a reputation for giving students a lot of different opportunities when it comes to how and where they learn. They have a significant percent of children attending charter schools as I think we’ll talk about it in a little bit. They had the nation’s first education savings accounts.
But the tax-credit scholarships were really where it began, and this was a way for individuals to contribute either to causes that they believed in or contribute to a purpose driven nonprofit that then would award scholarships to students really from all walks of life.
And so now that tax-credit scholarship has really been in place going on 25 plus years.
Jason Bedrick: Arizona has four different tax-credit scholarship programs. Could you tell us a little bit about each of these different programs and what makes them different from each other?
Jonathan Butcher: Sure. The groups that we’re working on behalf of students in Arizona, I think capitalized on the success of this early tax-credit scholarship that was generated through individual contributions. Over time they added a tax-credit scholarship for businesses, corporations, and it worked generally the same, right?
You had businesses make charitable donations to non-profit scholarship organizations and they would award scholarships. But in this case with the corporate contributions, these scholarships would be to low income students.
Jason Bedrick: The original tax-credit program that individuals could donate to a scholarship organization and get a tax credit, those scholarships could go to any students. But with the corporate donations, those scholarships could only go to low-income students. Is that right?
Jonathan Butcher: That’s right. And those low-income students would also be leaving… They would need to be leaving a district school and attending a private school using this corporate scholarship.
Now, of course, there are limits on both of those scholarships. There’s a limit on how much individuals can contribute on the individual side. And then on the corporate side, there’s a limit on how much overall the state can award annually in tax credits to the businesses that are making the donation.
There are ways that the state hemmed in a little bit the scholarship options. But even with all that, I mean you’re still talking about upwards of 50,000, 60,000 students today who are taking part here.
Jason Bedrick: And what are the other two tax-credit programs?
Jonathan Butcher: Sure. Around the same time as the corporate scholarship was created, a scholarship program was also created for children with special needs or children who are in the foster care system in Arizona.
And this is called Lexie’s Law. It was named after a young girl in Arizona named Lexie Weck who was using a voucher at the time. And then some court decisions eventually ruled that voucher program unconstitutional. And so Lexie’s law came out of that to allow these students with special needs to continue to access their chosen school.
Lexie’s Law is there specifically for children with special needs. And then there is a bit of a twist on the individual scholarship that we were talking about, the oldest scholarship in Arizona. There’s a bit of a twist here because at a certain point the charitable contributions that individuals make, if it’s over a certain amount, that amount of money that’s donated by individuals must be used by a scholarship organization specifically for low-income students.
There’s a design in there I think to continue to put a bit of a focus on the students that really otherwise would not be able to access a private school.
Jason Bedrick: Right. And those students have to be switching out of a district school or a charter school, right? That’s known as the switcher credit.
Jonathan Butcher: They’re very similar exactly. Very similar to what’s within the corporate eligibility rules, but it’s being applied now on the individual side. Again, once the charitable contributions from an individual go over and above a certain amount.
Jason Bedrick: Now, you had mentioned a lawsuit. Could you tell us a little bit about what was the nature of the lawsuit against the voucher program? What was the voucher program, and what was the outcome?
Jonathan Butcher: Sure. Many people will be familiar with traditional K—12 vouchers or private school scholarships that are funded through the state general fund. This is something that has been in place in Milwaukee for many, many years. That was really the first. This is what Milton Friedman, I think, really conceptualized originally decades and decades ago when he first was really talking about private school choice for students.
It was this idea that the state would take money that a student would otherwise be using when they are in a public school and instead those resources would be used by a parent to choose a private school instead.
Arizona had enacted such a program. Teachers unions and their allies sued to shut the program down in a case called Cain v. Horne. Horne at the time was the Secretary of Education in Arizona.
And so, as this lawsuit weaved its way through the courts, eventually the case ruled that the program violated the Arizona Constitution and could not remain in place. What was curious about the hearings, especially near the end, was that in the discussion of what exactly was the constitutional issue here, the attorneys and the judges had a bit of a discourse about how if the voucher could be used for more than one thing. If it could be used for more than just private school tuition and perhaps two or three additional things, which would put the parents in the driver’s seat of perhaps even customizing their child’s education, such a program would be constitutional.
As that ruling was handed down, an idea resurfaced from research that the Goldwater Institute had done some years before. Dan Lips originally wrote a piece about how there could be this flexible approach to choosing multiple learning options for a child all at one time.
And so some work was done with state lawmakers who liked the idea and the lawmakers put together a proposal to create what we now know as education savings accounts. In Arizona, of course, they’re called empowerment scholarship accounts.
The ESA is that now our law in six states really all came after this court ruling in Arizona that one would think was a setback to private school choice. But actually it turned out something that eventually inspired a very unique and challenging way for families to find great options for their students.
Jason Bedrick: It appeared to be a setback at first, but the court left a trail of breadcrumbs that led education policy analysts and advocates for school choice in Arizona to take this idea that had been sitting on a shelf and put it into practice.
Why don’t you tell us a little bit about how the ESA works in Arizona. How did it work when it was first enacted and then how has it changed over time?
Jonathan Butcher: Certainly groups like The Institute for Justice, the Goldwater Institute, EdChoice of course then at the time as The Friedman Foundation, all were really central to all of the parts of finishing the lawsuit and then helping to re-conceptualize this idea that Goldwater had written about some years before and put the proposal in place.
At the time that it was enacted, in 2011, the program was just for children with special needs. And so, this was again taking a cue a little bit from Lexie’s Law. But it was designed to help really students who are really the most vulnerable in the state.
And the program started very small and the first round of applications, there were only about 75 students who took advantage of the essays. By the end of the first six to eight month period, there were about 100 to 150 students. The program had some steady growth among children with special needs that at the time.
Jason Bedrick: Right. Now, I understand that, I mean those groups that you mentioned Goldwater, EdChoice, The Institute for Justice eventually wanted universal access. Why did they start with this particular population?
Jonathan Butcher: I think that knowing that helping children with special needs was so important in Arizona and really in every state. I mean I think these are students that can uniquely benefit from something like education savings accounts because a child with special needs may need two or three services to help them, right? They may need a private school that is unique to help their need. They may really benefit from an education therapist outside of school. There may be some tutoring that could help them with a specific subject.
This concept was I think, a great fit for those students, right? I think those students could benefit perhaps more than their mainstream peers from having those options. But as we’ve seen, the program grew over time, eligibility expanded and we saw students from all walks of life take advantage of these same things, right?
Today, and I don’t mean to fast forward too much. But today we’ve got children who were assigned to failing schools in Arizona who are using the accounts, students for military families. And many of these students about a third right, based on research that EdChoice has published. About a third over time, have used the accounts for at least one, more than one educational product or service, right?
Exactly as ESAs were designed. And that I think is what’s so exciting about the future of these accounts is that we’ve been able to see children from all over use the accounts for more than one thing. And that’s exactly what the original design was.
Jason Bedrick: All right, so we’ve got students with special needs. You mentioned students that are assigned to a failing school, which in Arizona is the…
Jonathan Butcher: DNF schools, part of the report card system, yeah.
Jason Bedrick: And then you’ve got students that are either children of active-duty military personnel or those killed in the line of duty or even police killed in the line of duty. You also have students that are living on a Native American reservation and assigned to one of their schools. Are there other categories of eligibility?
Jonathan Butcher: Children adopted from the foster care system. Children who have been adopted out of the state foster care system are also eligible. Siblings of all of the students that you just mentioned are also eligible. And that’s a nice, I think, benefit to families that don’t want to have to drive to multiple places in the morning to get their children to all these… Because one child’s eligible over here and the other child isn’t.
As well as providing the same great option that the parent chose to all of the children in their family. That’s a real benefit to them. As well as incoming kindergartners and first graders that meet any of that criteria.
The program is really set up in such a way that it can reach and help students all across the state, even with somewhat narrow channels of student eligibility.
Jason Bedrick: Right now, the program focuses on the students who are from particularly vulnerable populations. I want to get into how the program was expanded and then how that expansion was rolled back. But first let’s talk a little bit more about how the families who are using the program are actually using their ESAs. What sort of things can they spend on? How do we see them spending? I know that you’ve conducted some reports looking at how exactly ESA families are spending their ESA dollars.
Jonathan Butcher: Sure. And this is really what separates a traditional voucher from an education savings account. With a traditional voucher or even a tax-credit scholarship in Arizona, families are using the resources to choose a school and then send their child to that chosen school. And that’s the end of it. And that’s a great option for many families.
But for others and education savings account allows them to use this pre-loaded debit card to make purchases at say an educational therapist. Even some outside physical activity related services that have to do with ed therapy or even their homeschool co-ops or P.E. classes that education savings account families can participate in using this card.
As well as choose a private school if they would like to choose a private school or find online classes. They can save money in their accounts from year to year, which is also a feature because the tuition expenses, oftentimes for private schools they get more expensive as you get out of elementary school and into middle school and then eventually into high school. Those tuition levels can go up.
It allows families to think ahead and plan for the future as well as save money for college and even make deposits in college savings plans, which is a feature that some families have taken advantage of.
This I think is why there’s such a wide appeal from state lawmakers elsewhere in the country. With five other laws that have been enacted, we’ve also had a dozen or more states at least consider or introduce legislation to consider such an idea.
I think this broad appeal comes from the fact that families can look at what their child’s unique needs are and say, “Hey look, my child is going to need more than something in a classroom.” Right? They’re going to need a tutor to help them in math because they’ve got to catch up. They may see that the school their child was assigned to before was one that left them behind a little bit in math or say in Spanish or a foreign language or something like that.
And so families can use their card, they can swipe it usually at a traditional card terminal and then they can access this product or service. It’s an exciting concept for the 21st century, right? Because consumers are doing this very same thing with everything from grocery shopping to getting rides around town and things like that.
Jason Bedrick: Now, of course so the ESA is clearly empower families with much greater ability to customize their child’s education. But what is to prevent them from abusing this freedom? Why couldn’t they, let’s say take this debit card and just run off to Caesar’s Palace?
Jonathan Butcher: Arizona broke new ground in creating some ways to help prevent some of this. And we can talk in a minute about what really needs to be done to capitalize on what Arizona started with.
But the provisions in Arizona’s law that help to prevent some of what you just described includes quarterly deposits on the card. As we were describing before, the cards are pre-loaded with the child’s funds at the beginning of each fiscal quarter. A family fills out an expense report at the end of the quarter. And if everything checks out according to what the department has in their records and what the account has for their records and what the parent has reported, the next quarter’s deposit will be made.
If there’s any sort of discrepancy, then the department can either freeze an account or they can put funds on hold until all of that is worked out and then the next quarter’s deposit can be made.
And that really has helped to prevent or at least quell, I would say some large scale issues of misuse. The state auditor has conducted a report. The original one was in 2016. They did find some really limited misspending, some of which may have been unintentional, some of which it may just been the parents didn’t know that a particular product or service was an ineligible expense.
In terms of overall spending, I mean, we’re now awarding… The state is using some $40 plus million in student funds for these accounts and the misspending, it’s hovering in an area of about $107,000 from the original report. The most recent numbers that came out, I think involved a lot of parents who they may have had confusion over what could be purchased or and I think there are some reports from families that their account was actually stolen or there was some identity fraud going on there.
But that I think leads into what really is the future for education savings accounts and the problems that the Arizona Republic has harped on in recent months with the education savings accounts, really lay at the feet of the Department of Education because they’ve had every opportunity to improve the features of the account, but it failed to do so. While other states are really now going beyond what Arizona started with. Both Florida and North Carolina in particular I think have some measures that help to do even more to not just fix fraud after it’s happened, but actually prevent it from happening in the first place.
Jason Bedrick: Right. I think it’s worth noting that the expense reports that you mentioned must include the receipts for the eligible expenses, and the debit cards themselves have vendor codes. They can only be used as certain vendors. They couldn’t actually use it at Caesar’s Palace. They can only use it at certain vendors.
Although it is possible at some of those vendors to purchase things that are not eligible items. But those things should be caught with the expense reports and the receipts.
But what are some of the other states doing that Arizona could learn from to improve the accountability and also frankly to improve the ability of parents to utilize their ESA funds?
Jonathan Butcher: Sure. Those are great points. The Merchant Category Codes or MCC codes that you described, those are really what prevent a parent from using their Education savings account at say a gas station, right? If they tried to swipe it at the terminal, it would recognize that the MCC code is not switched on for that particular expense. And so the card would be rejected, right?
At Disneyland or something like that. You can imagine a parent trying to misuse it often. I think what’s really happened more frequently than not is parents think that something is an educational product that they can buy. But the department has really not been consistent about which products are allowed and which ones aren’t.
Which is why Florida has done, I think a better job by they have a system in place that allows families to make a purchase and have it approved before the state turns around and provides the students funding for that purchase. They have a couple of steps leading into when a purchases is completed.
Jason Bedrick: Right. And then once it’s approved for one family that is approved for all the families in the program. Whereas in Arizona, I mean I’ve spoken with families who said that they purchased something else that had already been approved for another family and yet they got a message from the department saying that for them it was not approved.
There seems to be some issues with the Department of Ed. in Arizona, including things like denying workbooks, denying flashcards that families wanted to use for clearly educational purposes. That really should have under the statute been allowed, but that for one reason or another, the department said was not.
Jonathan Butcher: That’s right. And the agency’s been aware of this for a number of years. Including my work at Goldwater, much of what we did was to alert the department to these inconsistencies. In fact, just recently over the past 12-18 months the institute wrote a letter to the Department of Ed. listing some of the things that they had been inconsistent about over the years and they agreed to change a number of their practices to help put them back in line with what the law had said.
Really, I think the future of education savings accounts, though, is learning from these mistakes that Arizona has made, albeit, the families who are still applying and clamoring to use these accounts. It’s still there. I think the families that are using the accounts in Arizona generally speaking, are still very happy with them.
The growth in the program continues to today. And what I think we need to see in the future even goes beyond what Florida’s doing. I think, and some of this was sketched out in Nevada when Nevada’s law passed several years ago and has been talked about some in North Carolina. But there are financial management firms that some people may be familiar with from health savings accounts that are already set up to operate such a system as education savings accounts.
And what would happen is the state would have a list of approved providers or they would have a method by which those that approved services or schools would be able to get signed off or get a stamp from the state saying, “OK, this is a valid private school. This is a valid online school, et cetera.”
And then there would be an entity that would facilitate the purchases, right? And what would happen is that a parent would say, “Hey look, I want to use my account over here.” And they would initiate a transaction. And then the company that monitors the cards, the financial technology company would say, “Great, this purchase checks off. This is a valid education expense. This person over here is a valid participant in the program. We will make the transaction happen.”
And then that will prevent many kinds of fraud going forward. This technology already exists and is being used in other areas. Even in other state services are using very similar technology to this.
Jason Bedrick: Right. Groups like BenefitWallet, SAP or REBA, they’re already in this field. They’re already doing this thing and could be doing more in the field of education.
Jonathan Butcher: Exactly. These companies exist already. They are in place and in fact they have even made presentations before some of the states that you and I talked about, Arizona being one. The possibilities are out there and it really it’s just going to take, I think some initiative with the agency to understand that at the very end, right? At core of all of this is providing a great service to parents and students.
And I think that moving forward with education savings accounts with these technologies is really in the best interest of students, especially those with unique needs.
Jason Bedrick: Now, speaking of moving forward, legislators in Arizona last year tried to move the program forward by expanding eligibility to essentially all students who are either entering kindergarten or first grade or who were switching out of a district or charter school to enter the program.
And yet there was a group called Save Our Schools Arizona that saw this for some reason as a threat to the public school system. They gathered enough signatures to refer the law to the ballot so that it was not enacted in 2017. It would only be enacted if the voters approved it. The voters did not approve it in the mid-term election. What happens to the program now and why do you think the voters did not approve the expansion if the participants in the program are so happy with it?
Jonathan Butcher: The source of this really goes back to the lawsuit that came after Cain v. Horne, which was the one we were talking about earlier. After Cain v. Horne in 2011 when education savings accounts were enacted, the Teachers Union and their allies, including the School Board Association, actually sued to take education savings accounts away from children with special needs in 2011.
And so they filed. The case was eventually called Niehaus v. Huppenthal. And so the goal from those groups the State Teachers Union and the School Board Association was to force children with special needs to attend their assigned school. They wanted those children to have fewer options. That was their goal.
They lost that lawsuit. And so they turned to the next political avenue at their disposal, which was a ballot measure. SOS was supported by the State Teachers Union. It was supported by the School Board Association and it was another effort to limit learning options in the state.
I mean I think you need to scratch below the surface very little before you see the union’s fingerprints are on this. They advertised for it. They spoke out in favor of trying to limit the program. This wasn’t just about the expansion that lawmakers enacted in 2017. This is about the groups that are interest groups for district schools trying to limit parental choice in education. There’s really no way around that.
The ballot measure would have, if there was a yes on the ballot measure, it would have allowed the law that was passed in 2017 to expand the program that you just described. It would have allowed that to stand. The no vote on the ballot measure, which was the end result, what it means is that the program will not expand as described in the 2017 legislation.
However, the existing program remains. And not only that, but in the existing program, the cap or limit on the number of students that can apply each year, which under current law stands at about 5,500 students. That cap falls off the program next year. And so today in Arizona we have about 250,000 students who are eligible for the accounts. That number, of course, goes up and down a little bit based on how failing schools are categorized in Arizona.
But be that as it may, we’re talking about 250,000 children are eligible for the accounts and this opens it up to all of those students next year.
Jason Bedrick: And if yes had passed, it would have been voter protected and it had a hard cap in 2020 of 30,000 students. What does it mean that it would have been voter protected?
Jonathan Butcher: Part of some of the details surrounding a ballot measure in Arizona is that once it is locked into place or once voters vote a yes on it or confirm it cements that legislation that was approved or on the ballot. That language, so that it can’t be changed without a significant move by the legislature.
Jason Bedrick: The three-fourth’s majority.
Jonathan Butcher: Yeah. Three-fourth’s vote to change it. It makes it very, very difficult to adjust it in the future. With this no vote I think there’s some potential to potentially expand even the law in the future in a slightly different way.
But I think more importantly, the children who are eligible today remain in the program. Those who are using their accounts can still use their accounts, and the limit or the cap that’s on the program now is set to fall off next year. The future really remains bright for Education savings accounts.
Jason Bedrick: Right. It wasn’t school choice that was on the ballot. It was this expansion and anybody who supported school choice basically had a choice. You either take one giant step forward but then you’re frozen in place, or you can take one step back but it’s a lot easier to take many steps forward going forward.
Most of the school choice organizations, including EdChoice, actually stayed out because it was, I wouldn’t call it a no-win scenario, but there were costs and benefits to both winning and losing and so they stayed out.
Jonathan Butcher: It was a win on either side, right? I mean there’s a potential for a benefit with either way. I mean I think there are… And there are benefits on either side. The bigger thing I think is for people to understand that there are active special interest groups that will do whatever they can to limit parent choice in education, even if it is primarily for children with special needs.
I hope people understand that. That the Teachers Union and the School Board Association, they want children to stay in their assigned schools and there’s no… And they will do whatever it takes to make that happen.
Jason Bedrick: Before we close, are there any specific recommendations that you have for policy makers in Arizona to improve the ESA?
Jonathan Butcher: Well, sure. I think some of the technological advances with financial technology really need to be done. It’s long overdue for the Department of Ed. and the Treasurer’s office to work together to update the way that the accounts are provided to families and then the way that transactions are facilitated. That technology is there. It really just needs to be taken advantage of. And so I think it really behooves these agencies to do that in the best interest of students.
I think understanding that the families that are in the program now, particularly those who came from a difficult situation, whether that was a failing school or a child with special needs, I think that these families are uniquely creating a great experience for their child. And that’s such a life changer for students, and students and their parents.
Making that the most effective way to find a learning experience for students is something that needs to be preserved. It needs to be talked about at the capitol, not as some effort to take money from public schools. It needs to be talked about as a way that is actually saving money for district schools. It is providing a unique learning experience for students.
All of these things that are helping, particularly students coming from difficult situations, again, whether that’s the school they were attending before or whether that’s the unique need that the child has. This is something that’s very powerful and lawmakers should continue really to try to make it better.
Jason Bedrick: Do you think the Department of Education is the right agency to make the changes that you have suggested to improve the implementation of the program?
Jonathan Butcher: Even at Goldwater and now at Heritage, I’ve long suggested that these financial technology companies can do it outside of the Department of Ed. Arizona’s department has really chosen to create a new system out of scratch to operate these accounts. There’s some credit due to them for making the system work out of the gate, but it’s not necessary anymore.
There are now things that can pick up what they started and make it even better. That agency’s not the right place to be handling something like this. This is something that really the technology is there to do it outside of a state agency.
And the model really was designed out of what happened in Nevada when the early talks were ongoing about their education savings accounts. Some of those conversations have continued in Florida and even into North Carolina.
Other states as they think about education savings accounts in the future are talking about doing it beyond just the limits of what a state agency may do.
Jason Bedrick: Jonathan, thank you so much for coming on the podcast. My guest today has been Jonathan Butcher from The Heritage Foundation. If you want to hear more EdChoice Chats, please subscribe on SoundCloud, iTunes or Stitcher. You can follow us on social media @edchoice. And please sign up for email on our website at edchoice.org. Thank you for listening.