Op-Ed: New study finds 0.2% of Arizona ESA money spent on big unallowable purchases

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For decades, cynics have used extremely rare cases of government misspending to demonize entire groups using public assistance. In the 1970s, the stereotype was a Cadillac-driving welfare recipient. Now, it’s a school choice parent and Legos. Over time, the “welfare queen” stereotype was found to be rooted in exaggeration and biases. New research questions popular narratives around school choice parents as well.

A new study, which I co-authored with Susan Pendergrass, offers a more rigorous and comprehensive look at the extent of irresponsible spending in Arizona’s Empowerment Scholarship Account (ESA) program than what was previously published in local news or by the Arizona Department of Education (ADE).

We estimate an unallowable spending rate of less than 2%. Most of the unallowable purchases were from relatively innocuous purchases like cleaning supplies or backpacks. When narrowing down unallowable purchases to the expensive items, unallowable spending was just 0.2% of all program spending. These numbers could easily get lower with some strategic administration by ADE.

To understand why these numbers are so much lower than numbers previously circulated, it is helpful to know the channels through which families can spend ESA money.

The largest spending channel is called Direct Pay, which accounts for 54% of total money spent through the program but just 18% of all transactions. The second largest spending channel is Reimbursement, which makes up 37% of money spent despite being only 8% of all transactions.

The smallest spending channel is Marketplace, which effectively is a collection of over 100 state-approved places to shop online. Marketplace makes up just 9% of all program spending but 73% of all transactions that occur. This is predominately where controversial spending stories originate from, and the program’s unallowable spending rate is heavily weighted by Marketplace. But because the average Marketplace purchase is just $59, its unallowable spending is just 1.26% of total program spending.

Altogether, even including the much smaller rates of unallowable spending in Direct Pay and Reimbursement, we estimate unallowable spending would round up to 2% of the total spend.

Our study aids public understanding of Arizona’s ESA program by offering a significantly stronger confidence level and margin of error than in ADE’s self-audit. We also offer a comprehensive picture of program spending rather than limiting our scope to the riskiest categories.

It is crucial to look at unallowable spending rates and not simply unallowable transaction rates. Ultimately, we care about unallowable spending because it is taxpayer dollars getting lost. If one only looks at quantities of transactions, one treats paper towels as consequential to taxpayers as a thousand-dollar computer graphics card.

If ADE tried just getting its unallowable transaction rate as low as possible, it risks losing much of the money it saves to enforcement costs, leading to no ultimate improvement in public benefit. Arizona is seeing that problem right now when it comes to SNAP enforcement. Because federal penalties are based on transactions and not spending, the state has to spend enormous resources focusing on tiny unallowable purchases.

ADE can do better if it focuses on systemic and technological improvements. For one, it should improve clarity. ADE’s allowable and unallowable item lists have large gray areas and are sometimes self-contradicting. Clarity here will make compliance easier both for families and administrators. Additionally, ADE can use technological resources seen in other ESA states that prevent users from selecting clearly noneducational products in the first place.

While there is low-hanging fruit for improving stewardship of taxpayer dollars, evidence suggests public outcry over Arizona’s ESA is dramatically disproportionate to what is actually seen in the transaction data.