There are certain inescapable signs that the holidays are upon us: lights on saguaros, bell-ringers at the malls and Arizona public schools soliciting last-minute tax-credit donations to fund after-school sports, the arts and field trips for children.
Schools deliver their annual solicitation to parents and education supporters via school websites, direct e-mails and even in movie-theater ads at this time of year, with the Dec. 31 deadline looming to donate for credit on this year’s state income taxes.
In Gilbert, Mayor John Lewis threw his support behind the program by declaring December tax-credit awareness month for the town’s schools.
The individual state income-tax credit for the support of extracurricular activities or character-education programs is now in its 16th year. It allows donors to take a dollar-for-dollar state income-tax credit of up to $200 for individuals or $400 for married couples in return for a donation.
The write-offs are taken by donors as subtractions from their income-tax liability on their annual state income-tax returns. It cost the state general fund $51.7 million in uncollected revenue last year, when a quarter-million donors gave a record amount in gifts to 1,380 district schools and 403 charter schools, Arizona Department of Revenue records show. District schools accounted for 86 percent of the total.
Since its inception, the program has cost Arizona’s general fund nearly a half-billion dollars, and tax-credit donations are expected to increase this year, as they have for all but one of the past 15 years, according to Darlene Teller, a Revenue Department senior economist who monitors the program.
School officials say tax-credit funds help them stay financially afloat by paying for non-classroom expenses and allowing them to focus general-fund spending in the classroom.
Yet The Arizona Republic has found that the program typically benefits only affluent schools, where parents generally can afford to make donations to cover fees for their children to play sports, get involved in the arts or go on field trips — and pick up the tax credit that lowers their state income-tax burden.
The Republic also found limited oversight of how the money is solicited and spent, despite stringent rules on how such funds are supposed to be used.
The Republic analyzed an Arizona Department of Revenue database and 2011 and 2012 financial reports in which public district and charter schools reported how much in tax-credit donations was raised and how it was spent. The Legislature required public schools to start filing those reports after calendar-year 2011 in an effort to gain more accountability.
The Republic compared that information with data it collected on schools that administer a federal free- or reduced-price lunch program.
Analysis showed that schools with a high percentage of free- or reduced-price lunch students raised little to no tax-credit money to benefit children, while 102 public schools in mostly affluent areas and 14 charter schools raised more than $100,000 each last year, with 24 of those raising at least a quarter-million dollars apiece.
The biggest recipient was Tucson’s Catalina Foothills High School, which raised nearly $1 million in 2012 and spent $460,101 on athletics and $375,286 on its band program. The school has less than 9 percent of its students on the meal program, among the lowest in the state.
The Republic found that schools where less than 25 percent of students qualified for the federal free- or reduced-price lunch program received more than double the number of donations of schools where more than half of children were on the meal subsidy.
“The rich schools can do it, but they don’t need an extra boost. Yet they are the ones raking in the most money. It’s doubly unfair,” said Gene Glass, an Emeritus Regents’ Professor at Arizona State University who specializes in education policy.
Glass said the tax-credit program doesn’t help children in low-income schools because their parents typically do not earn enough money to pay state income taxes, so it is not beneficial for them to make a tax-credit donation.
Qualifying for the tax credit varies depending on a taxpayer’s Arizona adjusted gross income and the number of exemptions and deductions taken.
At a minimum, an individual taxpayer would have to make at least $14,767 a year to qualify for a $200 credit, while a married couple filing jointly would have to make at least $29,527 to qualify for a $400 credit, according to the Arizona Department of Revenue.
Problems noted
Image by Ginger Rough/The Republic
The number of donors and donations to Arizona’s public schools extracurricular tax-credit program has, for the most part, steadily increased since its inception in 1998. The program, which gives a tax write off for Arizonans, cost the state general fund $51.7 million last year.
The Republic’s examination of the Income Tax Credit for the Support of Extracurricular Activities or Character Education Programs also found:
District and charter schools successful in raising tax-credit funds have saved for a rainy day, with 75 public schools and seven charter schools having at least $25,000 unspent at the end of 2012.
Eight public schools had balances in excess of $100,000.
Teller, the Revenue Department senior economist, said there is no law prohibiting schools from saving tax-credit funds. But she said that was not the program’s intent, and she has encouraged schools to use donations around the time they are given.
A few schools have used tax-credit funds for questionable expenses, such as paying for a prom, a teachers luncheon or Advanced Placement exam fees that can give students college credit.
Teller said that, after reviewing the schools’ reports, she informed those schools that the payments were outside the scope of the law. She also warned them that if they did not repay the tax-credit accounts with other funds and use tax-credit money appropriately, donors who made contributions may not qualify for the income-tax credit.
There is limited disclosure on how the funds are used. Beginning with the 2011 calendar year, public and charter schools for the first time were required by law to report annually how they spent tax-credit funds, but the law did not require a detailed breakdown.
There are few consequences for not supplying details, unless Teller spots a mistake or a public complaint is filed. Most schools used only generic reporting categories showing expenditures in areas such as sports, orchestra or drama.
Some schools misreported the amount of money raised and spent.
The Paradise Valley Unified School District, for example, revised 2012 reports for five of its high schools after The Republic raised questions as to whether those school had large tax-credit surpluses.
The district found it had made accounting errors with all those schools, which then reported much smaller surpluses.
After The Republic raised questions about a potential large surplus at Prescott High School, the Prescott Unified School District also said it underreported by about a quarter-million dollars the amount the school spent in tax-credit funds last year.
The majority of public and charter schools follow a state law that says tax-credit donations can be used only for extracurricular activities that require enrolled students to pay a fee to participate, or for character- education programs.
Some large school districts such as Mesa Public Schools have strict guidelines on how its schools can use tax-credit donations.
Tax-credit funds in general cannot be used for senior trips or events that are recreational, amusement or tourist activities. And the money cannot be put to regular classroom use such as buying computers, according to Teller.
Although Teller has caught some questionable expenditures, she said it is difficult for her to monitor every Arizona public school.
She said that she expects schools to follow the law but that school employees who handle the accounts at individual schools often are not familiar enough with the law to know what is disallowed.
Troubling letter
One charter school that may be out of compliance is Eduprize Schools in Gilbert, which informed at least one donor that “one hundred percent” of tax-credit donations made last year would be used to “advance our technology for our students and staff.”
The Republic obtained from a parent a January 2013 letter from Lynn Robershotte, the school’s founder, that said classrooms were being outfitted with iPads, improved computing and projectors to enhance instruction with tax-credit donations.
Cindy Nelson, an Eduprize parent, said the school will not allow parents to make tax-credit donations for extracurricular activities. Instead, she said, the school has them pay fees to a parent-teacher group to fund those activities.
“The whole issue has been bothering me for years,” Nelson said. “It’s just not right. We have to pay the money, and they (Eduprize) won’t allow us to count it as a tax credit.”
When informed of the letter by The Republic, Teller said using tax-credit funds for non-extracurricular activities is illegal and doing so would jeopardize an individual’s tax-credit donation and require the taxpayer to amend his or her income taxes and possibly repay the state.
“There’s a certain amount of responsibility for the taxpayer to know if it (donation) is going towards an extracurricular activity,” Teller said.
Robershotte said the letter was “poorly written” and should have stated that 100 percent of “non-designated tax-credit funds” had gone to technology. She added that parents are allowed to use tax-credit funds for extracurricular sports, music or other programs.
Robershotte added that Eduprize charter schools in Gilbert and Queen Creek were informed this month that the Attorney General’s Office was investigating how tax-credit funds had been used for the past three years. A spokeswoman for the Attorney General’s Office said Tuesday that it was responding to a complaint made to the office.
Some public-school officials told The Republic that the tax-credit law is murky and that a qualified extracurricular activity or a character-education program can be open to interpretation.
Buckeye Union High School, for example, used $2,600 in tax-credit funds on a deposit for a prom venue after the junior class ran short of money. However, Teller and the Arizona Attorney General’s Office told the school that was not a “qualified extracurricular activity for use of the tax credit.”
“We figured it was a school-sponsored activity,” said Jeff Simmons, associate superintendent of operations for the Buckeye Union High School District. “We didn’t understand why that’s not an extracurricular activity. They took a very narrow view.”
Simmons said the district used developer donations — money local builders give to the district — to replenish the tax-credit account.
The use of tax-credit funds is also under scrutiny at Chandler Hamilton High School. The Attorney General’s Office in July launched a potential criminal investigation into whether thousands of dollars in tax-credit funds dedicated to Hamilton’s marching band were improperly used. The investigation began after a parent complained to the state Department of Education.
Hamilton Principal Fred DePrez said he has been perplexed by the investigation, but he said the school is fully cooperating with the state. The Attorney General’s Office said the investigation is ongoing.
DePrez added that Hamilton traditionally has been successful in raising tax-credit donations because of the school’s success in sports and other extracurricular programs. “People want to keep that going, and that is why they support us,” DePrez said.
Hamilton in 2012 raised $455,009 in tax-credit funds and had an unspent balance of $292,031 — the most in Arizona.
“It sounds like a lot of money, but most accounts have $1,000 or $2,000 in them,” said DePrez, whose school has 90 different tax-credit accounts.
“For us, the rule of thumb is to try and spend the money on the kids that it was raised for,” he said. “That doesn’t always happen, but that’s what we try to do.”
Program’s goals
The Arizona Legislature created the public- school tax-credit program in 1997 as a way to get a private-school tax credit approved, said Mark Anderson, the bill’s sponsor.
Anderson, who spent 14 years in the Legislature, said public-school teachers and school boards vigorously opposed his bill for a private-school tax credit, saying it would undermine public education. Anderson, now a West Mesa justice of the peace, said that adding a tax-credit program for public schools “helped us get enough votes to get it passed.”
Anderson’s House Bill 2074 squeaked through with the minimum required 16 votes in the Senate and 31 votes in the House. Then-Gov. Fife Symington signed it into law.
Symington said that the tax-credit programs have become a “fixture” in Arizona and that most residents are happy with them.
“I think they have been good public policy because, by and large, they have increased parental choice,” Symington said. “That doesn’t mean mistakes haven’t been made. But you don’t throw the baby out with the bathwater.”
Anderson agreed that most public schools today are pleased with the program, and he has no problem with schools saving money for a dedicated purpose.
But Anderson said some controversy remains with the private tax-credit program.
He said his intent was for the private tax-credit program to help low-income students get scholarships. But it has been used by middle- and upper-income families to help their children attend private schools.
Both tax-credit programs have been costly to the state general fund, according to state Revenue Department records.
The private-school tax-credit program and enhancements made to it have taken a collective $682.2 million from the general fund in the form of taxpayer write-offs since its inception, while the public-school program has taken nearly $497 million since 1998.
Who raises the most
Typically, high schools raise the most tax-credit donations because they have larger enrollment than elementary or middle schools, and they offer more extracurricular activities that qualify for tax-credit funds.
The public school that has raised the most tax-credit money in Arizona is Tucson’s Catalina Foothills High School, which raised $918,827 in 2012 — more than the combined total of the bottom 445 public schools that each raised $5,050 or less. Fifty-eight of those schools raised nothing.
Catalina Foothills recorded 4,296 donations — also tops in the state — and the school spent $956,382 in 2012, thanks to starting the year with a surplus in its tax-credit account.
“We need the tax-credit dollars so that the district can spend the money on math and English and media arts,” said Jody Brase, Catalina Foothills’ assistant principal and athletic director.
Brase said her school is fortunate to have “pro-education” parents and community members who are well-aware of the tax-credit program. She added that most students come from two-parent homes and that those adults have professional jobs, with two of the major employers being the University of Arizona and Raytheon Missile Systems.
Brase said tax-credit donations are used to pay for after-school transportation, equipment, uniforms or coaching stipends.
The next biggest fundraiser was Prescott High School, which raised $788,288 last year and spent $695,676. Its largest expense was sports.
Renee Raskin, Prescott Unified School District’s chief financial officer, said students are charged $130 each to play sports. Over a year, that and other extracurricular high- school fees add up to a lot of tax-credit contributions.
Among charter schools, the biggest tax-credit recipient was Horizon Community Learning Center in Phoenix, which raised $271,998 last year.
“The key is having outstanding parental support and getting people outside our community to donate to our program,” said Bill Thompson, finance director for Horizon Community Learning Center. “Our parents and staff understand it’s a grass-roots basis.”
Republic data reporter Matt Dempsey contributed to this article.
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