A Student Tuition Organization (STO) accepts donations for tuition assistance and awards scholarships so they can afford to attend an Arizona private school.
Financial Management STOs are afforded 10% of the total money allocated to cover administrative costs.
What is an ESA?
An Empowerment Scholarship Account (ESA) provides educational options for qualified Arizona students. By opting out of the public school system, parents can seek a range of alternative educational services, such as private school or home-based education, to tailor an individualized educational plan that is best for their child.
Administrative Costs By statute, the administration of the ESA program should be funded at 4% of the total funds generated by the program. Currently, the program has never been funded at 4% and is currently funded at 1.62%.
Financial Disparity
Federal grants are traditionally provided 15% for administering the awards, STOs are provided 10%, the average traditional Arizona district expends 8.7%, while the average U.S. district spends 9.8%, all while ESAs have never been funded at the statutorily mandated 4%.
Despite having more administrative requirements than STOs, ESAs are not granted the same spending authority or anywhere near the funding as STOs. Although both STOs and ESAs are inspired by the School Choice movement and both were created by the legislature, STOs have never been considered a taxpayer program in the same way as the ESA program.
Administration Duties Disparity
Administration of STO accounts require only a fraction of the work of ESA accounts, since ESA parents have an unlimited amount of schools, services, or products that they can access. In addition, there is an 803-1 student-to-program-specialist ratio that exists in customer support. But this only accounts for the first major difference in administering the two programs. While an STO application need only be reviewed once, an ESA application not only needs to be processed, but the account’s expense reports must be reviewed quarterly, creating four times the amount of touches and work per student.
This also does not account for all of the applications that are not approved. Of the approximately 7,000 ESA applications last year, there were 909 denials and 5,745 processed. More maintenance and effort are expended on the 909 denials, since ESA specialists regularly communicate the application mistakes to the parents. This means that ESA specialists are already doing a significant amount of work before they even get to the accounts already enrolled in the program, which require their own set of day-to-day work that STOs do not possess.
Pursuant to ARS § 15-2403(F), the Department (ADE) shall furnish to the joint legislative budget committee an estimate of the amount required to fund empowerment scholarship accounts for the following fiscal year.
To that end, the Empowerment Scholarship Account (ESA) Program has prepared the following data:
PROGRAM ENROLLMENT
| FY 2012 | FY 2013 | FY 2014 | FY 2015 | FY 2016 | FY 2017 | FY 2018 | FY 2019 |
| 144 | 302 | 761 | 1,113 | 2,175 | 3,360 | 5,042 | 6,500 |
TOTAL AMOUNT AWARDED
| FY 2012 | FY 2013 | FY 2014 | FY 2015 | FY 2016 | FY 2017 | FY 2018 | FY 2019 |
| $1,576,000 | $5,209,200 | $10,209,200 | $17,733,700 | $28,590,800 | $44,517,700 | $58,711,200 | $74,000,000 |
Current & Projected Administrative Spending
A portion of the program funds appropriated by the legislature in FY 2012 were reserved for administrative costs by allowing the retention of up to 5% (4% for ADE and 1% for the State Treasurer’s Office) of the funding that would have been generated by each enrollee.
However, the legislature has never funded the program at the full administrative 4% outlined in ARS § 15- 2402(() as funds in the Department of Education Empower Scholarship Account Fund (DEESAF) are subject to legislative appropriation through the budget process pursuant to ARS § 15-2402(D).
ADE ADMINISTRATIVE SPENDING AUTHORITY
| FY 2012 | FY 2013 | FY 2014 | FY 2015 | FY 2016 | FY 2017 | FY 2018 | FY 2019 |
| $0 | $200,000 | $200,000 | $200,000 | $401,000 | $799,000 | $1,200,000 | $1,200,000 |
ADE ADMINISTRATIVE FUNDS GENERATED (4%)
| FY 2012 | FY 2013 | FY 2014 | FY 2015 | FY 2016 | FY 2017 | FY 2018 | FY 2019 |
| N/A | $200,000 | $415,000 | $709,000 | $1,143,000 | $1,978,500 | $2,609,400 | $3,288,900 |
PERCENTAGE OF ADMINISTRATIVE FUNDING RECEIVED
| FY 2012 | FY 2013 | FY 2014 | FY 2015 | FY 2016 | FY 2017 | FY 2018 | FY 2019 |
| N/A | 3.84% | 1.96% | 0.88% | 1.4% | 1.79% | 2.04% | 1.62% |
For FY 2018, the legislature increased annual administrative funds from $799,000 to $1,200,000. This additional funding allowed the program to increase staffing levels and improve technology services, but as the program continues to grow with no additional funding for FY 2019, the Department will be unable to keep up with staffing needs and as a result services to parents will be impacted. The program has been consistently underfunded since its inception, and even at full capacity current staffing levels simply cannot fully keep up with the increased volume of applications, parent inquiries and other program responsibilities. Should
Proposition 305 pass in November, these issues will only be exacerbated as thousands of additional students would immediately become eligible. Additionally, the administrative provisions of the proposition would further challenge the Department’s already limited resources.
ESA Data System
Since receiving additional monies in FY 2018 to administer the program, the Department has implemented two information technology enhancements that have significantly streamlined the contract and expense reporting processes for both parents and ESA staff. The first is an electronic signature service for ESA contracts that has eliminated the vast majority of paper applications, which are costly and inefficient to process. Newly approved ESA families can now execute their contracts in a matter of minutes as opposed to having to mail or email a hard copy contract to ESA staff, saving them time and allowing staff to focus on providing other important services. The second enhancement has seen transactional bank data for ESA purchases fully integrated into the ESA expense report portal, which allows parents to easily reconcile their purchases when completing expense reports and has improved the Department’s ability to more reliably audit and monitor ESA accounts.
Funding Needs
In response to the program’s growth and to meet both the needs of the parents and students being served by ESA and the program’s administrative responsibilities, the Department would ask the legislature to consider increasing ADE’s spending authority for FY 2020 to the full amount allowed under the program, which even based on FY 2018 ESA awards would be $2,600,000. The majority of these funds would be used for increased staffing and additional information technology improvements. The Department can provide additional details on expenditure plans upon request.