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December 2012 Policy Study, Number 12-13


Education Savings Account:

A Path to Give All Children an Effective Education and Prepare Them for Life


A Model for Education Savings Accounts in Other States



Arizona’s experience can inform other states as they consider enacting education savings accounts. State leaders considering the program will need to address four critical areas:


1. Eligibility. All students should be eligible for a savings account, just as all children can attend public schools. Whereas savings accounts have the potential to provide specific experiences for children with special needs or in unique circumstances, it is this very feature that makes them so valuable for every student.


More and more states are enacting private school choice programs with broad eligibility rules. In 2011, Indiana Governor Mitch Daniels signed into law an opportunity scholarship program that allows middle-income and low-income families across the state to participate. In its first year, the Choice Scholarships program enrolled 3,919 students, the largest number of students ever to participate in a scholarship program’s inaugural year.[17]


In 2012, Louisiana Governor Bobby Jindal expanded the state’s opportunity scholarship program to include students attending schools rated “C” or below on the state report card. Approximately 380,000 students are eligible.[18]


Some states may not be prepared to process so many new savings accounts in the program’s first year, and Arizona policymakers found that establishing a new financial arrangement with a bank requires time and study. So, as Arizona lawmakers expanded the program, the additional students, such as children in failing schools, were phased in over a short time. This phase-in allowed the state’s administrative capability to keep pace with family participation.


2. Funding. State funding policies must be updated to accommodate real-time student transfers and funding models where education dollars follow the child.


In Arizona, schools are paid one year in arrears on the basis of enrollment.[19] Traditional schools submit enrollment reports to the state department of education at the end of the year, and the department sends checks to schools in the next school year on the basis of those counts from the previous year. However, traditional schools can apply for current-year funding increases if the school experiences an enrollment increase. However, no adjustment is made if enrollment decreases. This reporting delay costs taxpayers millions in payments to schools for students who have transferred elsewhere.


When the original education savings account law was passed, lawmakers funded the accounts outside of the traditional funding system. Student accounts were financed through a separate set of funds that had been set aside for children with special needs (the 2012 expansion changed the funding protocols so that accounts now receive money from the traditional school funding stream). Still, the system holds traditional schools harmless for one year after children with special needs leave or are enrolled in the savings account program.


Instead of insulating public schools from the reality of parental options or creating unique funding mechanisms, lawmakers should adopt protocols whereby school funds follow a child to his school, online class, tutor, or any other educational service of choice in real time.


Arizona’s charter school funding process is designed to reflect accurate enrollments in the schools, and this procedure is a model for the savings account program. Under Arizona’s charter law, schools report enrollment periodically through the year, and as the state sends monthly payments to schools, the payments are updated to reflect the current enrollment numbers.[20] Likewise, traditional schools should update their enrollment reports throughout the year and should have their payments adjusted accordingly. Students who opt for a savings account should be able to take their funds with them as they find educational opportunities outside the traditional public school system.


3. Allowable expenses. State leaders must carefully define the list of expenses for which parents can use savings account funds.


As mentioned previously, Arizona parents can use such funds for private school tuition, individual public school classes, textbooks, educational therapy services, online classes, standardized test fees, tutoring services, college savings plans, and college tuition.


But there are at least four other expenses parents incur when providing an education for their child and should be allowable expenses for education savings account funds: transportation fees; school uniform expenses; educational summer camps; and classroom materials such as pens, paper, calculators, computers and tablet devices.


The state department of education should make a list of all the types of approved expenses available to parents through the Internet and periodic mailings.


An Unexpected Surprise: Parents Create Their Own Buyers Guide
Shortly after Arizona’s education savings accounts became law, parents created an online message board on[21] More than100 parents signed up, a remarkable number considering only 150 accounts were awarded in the program’s first year.


The message board is now a virtual buyer’s guide for savings account families, with recommendations about private schools, textbooks, online classes, tutoring programs, and extracurricular activities such as swim lessons and special events at museums.


Parents ask and answer questions about how to apply and complete audit reports, and—now that savings accounts are entering their second year — parents from the first year are sharing their experiences with new families. Parents also arranged “meet-ups” with other families, a further extension of the virtual community.


Today, more than 1,500 messages have been posted online, and those messages serve as an online handbook for the accounts.


4. Preventing fraud and abuse. Every state and federal program that offers public assistance is subject to fraud and abuse. Education savings account programs should be designed with fraud protections that use the experience of other benefit systems, such as Medicare and food stamps. For example, the Arizona Department of Education limits the vendors at which parents can use debit cards, but food stamp debit cards also limit the items that cardholders can purchase, similar to food stamp policies. Savings account cards should have this protection added, so that when families use the check cards at large retailers (again, such as Walmart), the cards cannot be used to purchase groceries at the same time that curriculum or textbooks are being purchased.


State officials should also list vendors that have been “unlocked” on a state website or should distribute such a list to account families so that parents know which stores have already been unlocked. Maintaining an updated database such as this, along with accurate records on participating students, should be a central task for department officials who are overseeing the program.


State leaders should conduct quarterly and random audits of the accounts to reconcile the balances of families that turned in few or no receipts. With Arizona’s accounts, parents could be spending the money at approved stores on unapproved purchases and could be not submitting receipts. If the state audits the accounts only annually, state officials may not identify those purchases until conducting an annual audit. Strengthening investigative units such as this led to success against Medicaid fraud in Texas, reports Manhattan Institute’s City Journal. Between 2003 and 2004, Texas recovered $441 million from fraudulent transactions.[22]


Lawmakers should create a toll-free hotline where families or retailers can report fraud; those hotlines are a common practice in Medicare systems around the country. Arizona’s Health Care Cost Containment System offers a telephone hotline and a form that can be submitted online to report misuse of funds.[23] This measure alone will not prevent every misuse of state funds, but such a hotline could be part of the larger plan to prevent fraud.


State officials should also commission “compliance buyers,” or investigators who pose as individuals trying to commit fraud. The Special Supplemental Nutrition Program for Women, Infants, and Children uses investigators in this way.[24] This process will help to identify weaknesses in the state’s oversight of its education savings accounts and of vendors that are operating illegally so Arizona can ensure that funds are being spent appropriately.


Finally, state officials should outsource some of the fraud and abuse preventions through surety bonds. Those bonds are a form of insurance and are often used by building contractors, public notaries, and even public officials.[25] The bonds protect state taxpayers by requiring individuals to pay a small fee (usually much smaller than a typical insurance premium), and the surety company (a third party such as a bank) will guarantee that the individual complies with the provisions in a contract. The bond’s cost should be affordable for parents and should be an allowable expense for savings account money. For example, the National Notary Association offers bonds for Arizona public notaries at an annual cost to a notary of $26 (for a $25,000 bond).[26] If necessary, the surety company could use a collection agency to recoup funds if a parent misuses savings account money and either cannot repay or refuses to repay the funds. In the event that a parent cannot repay misused account money, the surety company will repay the state using money from the bond fees that parents paid.


How Surety Bonds Work


Surety bonds are a form of insurance.[27] This insurance vehicle could be used by a department of education to guarantee that parents fulfill their agreement for the education savings account with the state and that they spend funds only according to stipulations in the state contract. In turn, the department of education uses a bank — outsourcing the insurance — to provide the bonds, and the department then requires parents to pay a quarterly or annual fee for a bond.


What happens if a parent uses savings account funds for expenses that are not educational—for example, dinner at a restaurant or airfare for a vacation? When the department discovers the transaction through its auditing process, the surety company would attempt to recover the funds. If a parent refuses to repay or cannot repay the money, the surety company could send a collection agency to get the money back.


If this approach fails, the surety company would repay the state using money from the bond fees that parents paid when they were awarded an account.




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