---------- DOCUMENT HEADER ----------
---------- DOCUMENT HEADER ----------
ARIZONA HOUSE OF REPRESENTATIVES
Forty-ninth Legislature – First Regular Session
AD HOC COMMITTEE ON PRIVATE SCHOOL TUITION TAX CREDIT REVIEW
Minutes of Interim Meeting
House Hearing Room 5 -- 2:00 p.m.
Chairman Murphy called the meeting to order at 2:12 p.m. and attendance was noted by the secretary.
Members Present
Representative Richard A. Murphy, Chairman
Representative Andy Biggs
Representative Jack Brown
Representative Tom Chabin
Representative Debbie Lesko
Members Absent
None
OVERVIEW/DISCUSSION OF POSSIBLE RECOMMENDATIONS SUBMITTED BY AD HOC COMMITTEE MEMBERS
Jennifer Anderson, Majority
Research Analyst, Ways and Means Committee, reviewed
29 possible recommendations submitted by Committee Members (Attachment 1). She
added that at the conclusion of the meeting, after adoption of the final
recommendations, the Committee is required to submit a report to the Speaker, which
will be compiled by Staff.
Discussion ensued concerning the intent of Item #12 during which Mr. Chabin asked if tax directed dollars through student tuition organizations (STOs) should be limited to tuition only, expanded to tuition and books or to tuition and extracurricular activities. He opined that the language is ambiguous and needs definition.
Representative Biggs agreed that more definition is needed. He indicated that he is not sure it is necessary to make changes in the recommendations, but suggested the following:
Prohibit private schools from accepting scholarships for an individual student greater than the school’s total cost for EDUCATING that student.
Representative Lesko explained that she made this recommendation because she does not believe a scholarship awarded to a student should be greater than the cost of educating the student.
Chairman Murphy remarked that the Committee is not drafting a bill so it is not necessary to be overly specific in the recommendations. He conveyed the intent to hear public testimony before a more detailed discussion of the proposed recommendations.
PUBLIC TESTIMONY
Harry Miller, Executive Director, Tuition Organization for Private Schools (TOPS) for Kids, recommended the following reforms to the tax credit program:
He added that TOPS for Kids only supplies tuition needs, not book fees or other items. Families who ask for those are told that this is a tuition tax credit so only tuition needs are supplied. In response to a question, he indicated that he would not have a problem if the statute limited awards to tuition only.
Dr. Lawrence Mohrweis, representing self, related that he has been involved with STOs since 1998 when STOs first started, and he currently serves as President of the Flagstaff Scholarship Fund, which is an all volunteer organization. He reviewed a handout listing nine ways to enhance accountability of the tax credit program (Attachment 2). In reference to Item (9) to not allow donors to recommend children for scholarships at the time donors make donations, he indicated that it is illegal for a STO to collect money and give it to an individual child, but there is nothing wrong with parents trying to raise money for the school. The best court case on that is Davis v. U.S., which found that donor direct contributions are not appropriate.
In response to a question, Dr. Mohrweis clarified that the Davis v. U.S. case dealt with whether or not parents of Mormon missionaries can deduct contributions for travel for their children. The court ruled that all missionary contributions must be made directly to the church, which must have sole control over how the money is used. He added that recommendations are legal, but designations are illegal.
Representative Chabin noted that
Item #6 in the proposed recommendations (Attachment 1) requires that 92 percent
of the amount collected is to be rendered to scholarships for students,
7.25 percent is to be retained by the STO for administration and .75 percent is
to be sent to the Department of Revenue (DOR) for regulation and audits. He
questioned if that would be a problem for the Flagstaff STO. Dr. Mohrweis responded
that the Flagstaff STO is an all volunteer organization, but opined that is more
a political issue rather than an accountability or transparency issue.
Representative Chabin asked if he
would object to providing .75 percent to DOR for the purpose of regulation of
STOs and whether the Flagstaff STO could operate on 7.25 percent for
administration. Dr. Mohrweis replied that there would be no problem with those
percentages, but suggested that interest earned should be taken into account,
i.e., whether it should be allocated to scholarships or retained by STOs and
raise the allocation for scholarships to
92 percent.
Representative Chabin recalled
that the DOR determined that interest earned should be split
90-10. Dr. Mohrweis replied that he believes that is what DOR said at a
previous hearing but DOR does not require STOs to report interest. There is a
difference between reporting and what Generally Accepted Accounting Principles considers
revenue, which includes interest.
Chambria Henderson, Executive Director, Arizona Scholarship Fund, testified that she was part of the group that brought this idea to the Legislature in 1994 and it took three years to get it passed. On the day Governor Fife Symington signed the legislation into law, Lisa Keegan, Superintendent of Public Instruction, wrote a letter to Trent Franks containing the original intent of the founders of the law (Attachment 3):
“We must not, however, let this accomplishment be in vain. Until every child has the uncontested opportunity to receive the best education possible, as determined by their parents, we will inevitably fail. We must provide for a system where the educational dollars associated with each and every child follow them directly into the classroom of their choice.”
Scott Collins, representing self, stated that he receives a TOPS scholarship to help his children attend school. His wife was a teacher at Tri-City Christian Academy where his children attended school, but she passed away a year ago and he lost that extra income. His children love the new school they are attending and could not obtain a better education anywhere else. He has worked at Coca Cola for 11 years at the low end of what the company pays; it is a struggle to survive with five children, so he appreciates the TOPS organization helping with the scholarship.
Susan Schaffer, representing self, advised that she receives tax credits for private education for her child. She is blind and works as a speech pathologist at a private school in Gilbert, which her daughter attends. She is the sole support of her daughter whose father is deceased and she depends on tax dollars to pay about half of the tuition. She added that she is happy with the school and so is her daughter.
Liz Dreckman, representing self, Chandler, informed the Members that she is representing parents who could not attend the hearing and submitted their stories in written form for the record (Attachment 4).
Representative Chabin submitted emails he received on this issue (Attachments 5, 6 and 7).
DISCUSSION/ADOPTION OF POSSIBLE RECOMMENDATIONS BY THE AD HOC COMMITTEE
Chairman Murphy asked if anyone wishes to add to the recommendations before discussing each item (Attachment 1).
Representative Chabin brought up Dr. Mohrweis’ recommendation to require STOs to report interest earned, which Representative Biggs surmised is covered under Items #20 and #21.
Representative Chabin stated that the law is absent, and although the DOR interpreted it to mean that interest earned should be distributed based upon a 90-10 split, it should be addressed in the statute in terms of distribution of funds.
Chairman Murphy referred to Item #7 and indicated that if the recommendation is retained, a change could be made to address the issue in the first bulletin point as follows:
Allocates at least 90 percent of its TOTAL revenue to scholarships.
Representative Lesko moved that the Committee adopt its final recommendations for potential legislation in the 2010 Regular Session to include Items #1 through #29 from the recommendation sheet presented (Attachment 1).
Item #1
No discussion or changes.
Item #2
Representative Lesko moved to strike Item #2.
A brief discussion ensued concerning the fact that this is already federal law and it is perfectly acceptable to recommend a child as the beneficiary of a scholarship from an STO; however, designating a child as the beneficiary runs afoul of the law.
Representative Lesko commented that she wants to make sure a recommendation for a child as beneficiary is not prevented.
Chairman Murphy indicated that he does not believe Item #2 prevents a recommendation.
Representative Lesko withdrew the motion to strike Item #2.
Item #3
Representative Chabin moved to strike Item #3.
Representative Chabin stated that if a donor wishes to make a recommendation on behalf of a specific applicant for a scholarship, it can be done in a separate letter; to stay within the spirit of the law, there should be an absolute separation between the donation and the recommendation.
Dawn Wallace, Policy Advisor to the Majority, indicated that representatives of STOs may be able to describe the process in which donations are received and recommendations are made.
Representative Brown pointed out that these are general recommendations and details can be included when the bill is drafted, to which Representative Biggs agreed.
Representative Chabin indicated that he will go along with that, but submitted that there is a major distinction between this recommendation and some of the practices that are employed.
Representative Chabin withdrew the motion to strike Item #3.
Item #4
No discussion or changes.
Item #5
Representative Lesko moved to strike Item #5.
Representative Lesko said a means test for the private school tuition tax credit can be used, and testimony has shown that the economic status and need of a family are considered, but she does not believe it should be the sole consideration or mandated.
Chairman Murphy stated that based on testimony, financial need was not intended to be the only criteria when the program was created. The program was intended to create an opportunity for parents to exercise choice in where their child is educated. There may be people who do not meet the income guidelines but live in an area with chronically underperforming students and need to make another choice. Families should be able to do that without having to meet income criteria.
Representative Chabin indicated that it is very clear from written articles that there is concern about wealthy families taking advantage of this tax credit. This is a reflection of the corporate tax credit income guidelines.
Chairman Murphy said evidence thus far indicates that the vast majority of scholarships are given to families that meet the financial need criteria anyway. He opined that if this recommendation is passed, it should apply to public schools so wealthy families are charged tuition because taxpayer dollars pay for public school education.
Representative Brown opined that Chairman Murphy’s comparison is not equivalent.
Question was called on the motion to strike Item #5. The motion carried.
Item #6
Representative Lesko moved to strike Item #6.
Representative Lesko opined that the current amount of 10 percent for administration is fair. She does not know where the .75 percent was derived from but she calculated the total at $415,000, which seems like a lot of employees. She would prefer to obtain the impact on the DOR if and when a bill is passed so it can be addressed in the budget at that time.
Representative Chabin submitted that the program involves taxpayer dollars that every citizen has the right to be sure are spent well and in accordance with the law, which cannot be assured now because of the lack of regulation and oversight authority. Perhaps STOs could spend a bit less for administrative costs. He acknowledged that 7.25 percent is an arbitrary figure and the DOR was not asked how much would be necessary, but he requested that the motion be withdrawn and the Members accept the principle of the recommendation.
Representative Biggs noted that there are several recommendations for audits or CPA reviews, which is what he would like to see.
Chairman Murphy opined that other provisions cover transparency without adding to the burden of the DOR or changing the percentage structure. Testimony was given that the vast majority of STOs exceed 90 percent in scholarship contributions so he does not believe a mandate is necessary. Also, most charitable organizations use more than 10 percent of funding for administrative overhead in order to run efficiently. He pointed out that oversight can be accomplished with audits, and Item #8 states that an STO can no longer operate if an audit demonstrates noncompliance or other problems.
Representative Chabin submitted that there is no agency to review the audits and investigate any problems, and funding is needed for regulation.
Question was called on the motion to strike Item #6. The motion carried.
Item #7
Representative Biggs moved to amend the first bulleted Item in Item #7 as follows:
Allocates at least 90 percent of its TOTAL revenue to scholarships.
The motion carried.
Representative Biggs pointed out that the last bulleted item contains ambiguous language (facilitate, encourage, or permit) so specificity is needed when legislation is drafted.
Items #8 and #9
Representative Lesko suggested that the wording in Items #8 and #9 be combined in the legislation so there is no conflict.
Ms. Anderson clarified that Item #9 is an appeals process for STOs to challenge upon removal from the list, which means an STO would have to be noncompliant for 90 days before being removed from the list.
Item #10
Discussion ensued about providing
protection for innocent taxpayers in the event an STO is not certified but a
donation has been made, which Representative Lesko noted may be addressed by
Item #8.
Representative Biggs indicated the need to make sure the issue is addressed when the legislation is drafted.
Item #11
No discussion or changes.
Item #12
Representative Biggs moved to amend Item #12 as follows:
Prohibit private schools from accepting scholarships for an individual student greater than the school’s total cost for EDUCATING that student.
The motion carried.
Items #13, #14, #15, #16
No discussion or changes.
Items #17 and #18
Representative Biggs clarified that Item #18 is a reporting requirement while Item #5 makes a requirement in distribution of the scholarship funds. Item #17 is the same as reporting vis-à-vis.
Item #19
Representative Biggs surmised that Item #19 conflicts with Items #20 and #21.
Representative Chabin moved to strike Item #19. The motion carried.
Items #20, #21 and #22
No discussion or changes.
Item #23
Referring to Item #23, Representative Brown suggested changing “10 percent” to “COST OF LIVING” so it is more up to date.
Representative Chabin objected to raising tax credits at all.
Representative Chabin moved to strike Item #23.
Representative Biggs pointed out that testimony indicated that there is a net positive to the educational budget of the state when children leave the public school system. If so, it is very appropriate to raise the tax credit, particularly in this time of budgetary stress.
Representative Lesko said she introduced this recommendation. She has three children in public school, but it is important to continue to improve education so students are able to compete in the global economy. Testimony was given by parents that this program provides educational choice. She also received numerous letters stating the same and emails from constituents indicating that without this program, they would not be able to send their children to a private school. Testimony was also heard at a previous meeting from a professor that this program not only provides educational choice for parents, but saves the state and taxpayers money, i.e., between $34.5 million per year at the low end up to $86.2 million per year, which is a significant savings during a budget crisis.
Representative Chabin submitted that the state is facing a budget deficit of $1.5 billion that has to be cut between now and July 1, 2010 and an additional $2 billion plus next year. Every tax dollar diverted from the general fund so rich children can attend rich schools takes from every child that cannot attend a private school. During this budget crisis the only place to cut is in public schools, and for every $1 billion that is cut, 16,000 teachers are removed from classrooms. The state budget is in a crisis and any discussion of broadening tax credits for these purposes is very shortsighted. More discussion followed.
Question was called on the motion to strike Item #23. The motion failed.
Representative Brown moved to change “10%” to “COST OF LIVING”. The motion carried.
Item #24
Representative Biggs moved to strike Item #24. The motion carried.
Item #25
Ms. Anderson advised that Section 501 deals with tax-exempt organizations under the Internal Revenue Code; 501(a) includes 501(c)(3) but also allows other organizations to be included in the statute, but those organizations would still have to apply for a tax-exempt status from the Internal Revenue Service and file a 990 Form. The one difference is that donations to 501(c)(3) organizations are deductible, whereas that is not true for other types of organizations under Section 501. All STOs are currently classified as 501(c)(3), but with this change, new STOs would be able to file under a different classification under Section 501.
Item #26
No discussion or changes.
Items #27, #28 and #29
Representative Lesko moved to strike Item #27.
Representative Lesko said she does not know the reason for particularly targeting STOs.
Representative Chabin stated that with Item #27 there will be no question about some of the practices that were reported in newspaper articles such as a member of the board can be the chief executive officer, attorney, landlord, or relatives hired, etc., with tax directed dollars, which is an abuse of scholarship money intended to benefit children. He said this is in federal law and it is language he would like to see in terms of the state standard. For that reason, he recommended Items #27, #28 and #29.
Representative Lesko withdrew the motion to strike Item #27.
Representative Lesko moved to strike Items #27, #28 and #29.
Chairman Murphy stated that there could be situations where putting these recommendations in place could force an increase in administrative costs because someone can no longer give a charity a break by charging cheaper than market rent, for example. He opined that if the recommendations are adopted, it would also be appropriate to say no company that receives a state contract could engage in any of the same behavior because tax dollars are used.
Representative Chabin responded that these are tax directed dollars that require transparency and should solely benefit children and not individuals who can appear to be self-serving.
Chairman Murphy noted that with the transparency items in other recommendations, a potential donor would be able to review the distribution of funds and make a judgment whether or not to donate on that basis.
Representative Lesko submitted that these items are too restrictive because she can imagine some “mom and pop” organizations dedicated to improving education for children being impacted, perhaps increasing costs unwittingly.
Representative Chabin answered that for the most part, these are million dollar organizations. He knows there are “mom and pop” organizations; but he believes STOs should not serve the people involved; STOs should serve the children.
Question was called on the motion to strike Items #27, #28 and #29. The motion carried.
Representative
Lesko moved that the Committee adopt its final recommendations as amended. The
motion carried by a roll call vote of
4-1-0-0 (Attachment 8).
Without objection, the meeting adjourned at 4:34 p.m.
_______________________________
Linda Taylor, Committee Secretary
December 16, 2009
(Original minutes, attachments and audio on file in the Chief Clerk’s Office; video archives available at http://www.azleg.gov)
---------- DOCUMENT FOOTER ---------
AHC ON PRIVATE SCHOOL
TUITION TAX CREDIT REVIEW
2
December 10, 2009
---------- DOCUMENT FOOTER ---------