Effective oversight of the Student Opportunity Scholarship Program starts with the processes for granting and renewing a nonprofit organization’s authorization to accept tax credit donations. In order to qualify, an organization must be incorporated and have federally recognized 501(c)(3) nonprofit status and conduct background checks on all employees. In applying to the state treasury department, organizations also must explain how they will effectively serve students and families, and approve service providers as options for families to choose. To keep its authorization, an organization must furnish clean audits and limit overhead spending to the legally recognized limits.
Just as is true with the much larger outlays of current education funding, safeguards cannot guarantee the complete prevention of fraud or misuse of funds. But the measures embedded in the Student Opportunity Scholarship proposal are designed to ensure overwhelming fiscal integrity. Included is a measure that automatically requires an account to be suspended in cases where organizations detect substantial misuse of donor dollars.
A 2016 report looked to Arizona, the pioneer state for K-12 education savings accounts, for ways to ensure integrity and minimize fraud. In addition to regular audits, as provided in the Student Opportunity Scholarship legislation, the report cited the use of merchant category codes to help ensure families could not use accounts for illegitimate expenses. These codes could be borrowed from the credit card and debit card industry to reject purchases that do not fit the disclosed educational purposes that meet the guidelines set forth in law.
Under Michigan’s proposal, scholarship-granting organizations “shall implement a commercially viable, cost-effective, and parent-friendly system” for using accounts to pay for educational services. Such systems will not need to invented from scratch, though they may need to make minor adaptations to be used in a Michigan context. The proposal also requires parents to sign a statement acknowledging the eligible spending uses for their accounts.
Commercial vendors have worked to help implement similar programs in other states. Existing and emerging companies in this growing market can bring the expertise needed to provide financial technology and anti-fraud services, so that individual account-granting organizations do not have to reinvent the wheel. Privately contracted technical solutions offer the possible further benefit of streamlining administrative overhead, which could allow additional moneys above the 90% threshold to directly fund scholarships.
The Let MI Kids Learn initiative contains safeguards to ensure the integrity of donated scholarship funds, while encouraging scholarship providers to use funds in an accountable and efficient manner. That should give even greater confidence in the benefits of this proposal.