General Assembly should repeal poorly-constructed and misnamed education savings accounts program

By: - July 10, 2017 12:49 pm

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Now that the lackluster, uninspiring, harmful, disappointing, and misguided public school budget has become law, it is time to look towards next year’s priorities. By failing to adequately address the needs of our public schools in the 2017 budget, General Assembly leaders have much work to do in 2018. Any 2018 education agenda should focus on restoring adequate funding to our schools, increasing efforts to improve the recruitment and retention of educators, and providing the necessary supports to give low-income students the tools needed to succeed.

Unfortunately, the General Assembly has proven unwilling in recent years to tackle such big, important issues. But they should have the capacity to focus on low-hanging fruit. And there’s no lower-hanging improvement out there than reversing the plan to create “education savings accounts” (ESAs).

What are education savings accounts?

ESAs sound like a good, innocuous program. Everyone can get behind education and savings accounts. Unfortunately, the name “education savings accounts” fails to accurately describe what the program actually does. Under ESAs, parents of qualifying children will receive a debit card loaded with $9,000 to be spent on the child’s education. Funds from the debit card may be spent on:

  • Private school tuition, fees, and required textbooks
  • Accredited tutoring services
  • Curricula
  • Fees for standardized tests, advanced placement exams, and college entrance exams
  • Account fees
  • Educational therapies
  • Educational technology
  • Transportation to school or educational activities

ESAs don’t promote savings. Parents cannot add their own funds to the ESA. And the educational benefits are, at best, questionable. A more accurate name for ESAs would be “private education spending accounts.” Others, however, prefer a more provocative description, calling ESA’s “a voucher on steroids.”

The shortcomings of North Carolina’s new ESA program extend far beyond misleading nomenclature.

ESAs share the shortcomings of traditional voucher programs

The program suffers from the same shortcomings common with traditional voucher programs:

  • ESAs divert funding from traditional and inclusive public schools. When a student transfers out of public schools to receive an ESA, the school district loses the per-student funding related to that student. This creates difficulties for the public schools, as the loss in per student funding is greater than the operational savings that can be realized from having one less student. Schools have a number of fixed costs like building maintenance or employing a principal. These costs cannot be reduced when small numbers of students depart. As a result, per-student costs increase, while per-student funding remains constant.
  • ESAs needlessly subsidize educational costs for families who have already opted out of the public school system. Under many voucher programs, including North Carolina’s Opportunity Scholarship and the new ESA program, the eligibility criteria include a number of families who would have attended a private school even in the absence of the voucher program. The state derives no benefit from subsidizing the educational costs for these families.

ESAs have higher administrative costs than traditional voucher programs

ESAs are more expensive to administer than traditional voucher programs. Under a traditional voucher program, the program administrator determines eligibility, awards vouchers, and writes a check to the private school in order to cover tuition. Under an ESA, however, there are several additional administrative responsibilities. The administrator still must determine eligibility and develop an awards process. But the administrator of an ESA program must also issue each family a debit card and develop processes to monitor debit card spending to determine whether expenditures fall within allowable categories. It is incredibly expensive to provide such real-time monitoring and effective fraud prevention.

North Carolina’s ESA is particularly poorly-designed

North Carolina’s ESA program was buried in the larger budget bill and was never the subject of any committee hearings. Democrats and education advocates were given no opportunity to help shape the bill. As a result, the North Carolina ESA program is particularly weak:

  • North Carolina’s ESA opens significant new areas for fraud. Under North Carolina’s ESA program, monitoring of debit card spending relies almost entirely on self-reporting from parents. The legislation also requires an indeterminate number of audits, but fails to establish a minimum number of accounts to be audited each year. Even if an audit uncovers illegal spending, there is no requirement that the parent be removed from the program or be forced to repay the state. As a result, parents under North Carolina’s ESA face few barriers on misreporting spending on luxury items as “educational” or receiving kickbacks from unscrupulous tutors.
  • North Carolina’s ESA prohibits students from using ESA funds on postsecondary education. Compared to traditional voucher programs, the primary benefit of ESA programs is that they allow parents to apply any unspent funds at the end of the student’s high school towards college tuition. Every other state ESA program allows the use of ESA funds on college tuition. North Carolina’s ESA program, however, omits this benefit.
  • North Carolina’s ESA allows parents to double- or triple-dip into the state’s other two existing voucher programs. In addition to receiving the $9,000 ESA, parents could simultaneously receive $4,200 from the Opportunity Scholarship program (for students meeting certain income requirements) and an additional $8,000 via the Disabilities Grant Program. This triple dipping exacerbates the negative impact on the state budget. Normally, vouchers are seen (or, at least, promoted) as potential cost savers, as the value of the voucher is set less than the state’s per-student expenditure. But for North Carolina’s triple-dippers, the voucher awards will greatly exceed per-student spending, thereby creating an additional drain on state coffers.
  • North Carolina’s ESA program will decrease the per-student funding for students with disabilities in traditional and inclusive public schools. North Carolina’s funding for students with disabilities provides an equal dollar amount on behalf of every student with an identified disability. This creates a pool of funds from which the district can (hopefully) meet the needs of students with both high-cost and low-cost needs. But the ESA is likely to disproportionately pull students with low-cost disabilities out of the system, leaving less funding available for non-ESA students.
  • North Carolina’s ESA program lacks any accountability measures. Students will not be tested, and the state will not collect any data on student performance or parental satisfaction. This means that policymakers will have no means for evaluating the program and parents will lack good information to help them choose appropriate schools for their children.

A solution in search of a problem

In addition to the numerous weaknesses of North Carolina’s ESA program, there doesn’t appear to be real demand for another voucher program. Both of North Carolina’s existing voucher programs were over-funded in the 2016-17 fiscal year. According to the most recent data, both the Opportunity Scholarship Program and the Disabilities Grant Program have left about $2.7 million unspent this past year. $2.7 million represents 11 percent of available funds in the Opportunity Scholarship Program and 28 percent of Disabilities Grant Program funds.

Certainly, eligible families would prefer the more lucrative (and unaccountable) new ESA program. But the program is not meeting any sort of need. North Carolina’s ESA is simply expanding “choice” for the sake of expanding choice. It’s a triumph of ideology over sound policymaking.

What should the General Assembly do?

North Carolina’s ESA program is just the latest in a long line of General Assembly education initiatives that are poorly-designed knockoffs of programs that lack much evidentiary basis (more on that in an upcoming post). The General Assembly has been unwilling or unable to address obvious shortcomings in other major education initiatives such as school performance grades, Opportunity Scholarships, virtual charter schools, or Achievement/Innovative School Districts (ASD) (perhaps this is related to its unprecedented inability/unwillingness to hold oversight meetings).

Similarly, the General Assembly is unlikely to address the shortcomings of the new ASD program. If the General Assembly had the capacity to seriously assess and craft policy, it could develop measures to minimize fraud, stop triple-dipping, limit negative budgetary impacts, and provide accountability measures to inform parents and policymakers. Since the General Assembly lacks such capacity, and since the program would still be harmful to public schools, the only option is for the General Assembly to repeal the ESA program. Importantly, repeal in the 2018 legislative session should be relatively easy, as no families will have yet received their $9,000 debit cards.

Sadly, this debate on flawed, misnamed education savings accounts distracts from actual education savings accounts that would benefit North Carolina’s students. Similarly-named “children’s savings accounts” have been shown to increase the college-going and completion rates of under-served populations. Children’s savings accounts include 529 college savings plans and other savings accounts set up on behalf of a child’s education. In particular, savings accounts which are initially funded by an outside source (either a government or a foundation) can make a big difference, even with small savings amounts. Compared with children with no college savings, children with savings of less than $500 are three times as likely to attend college and four times as likely to graduate.

Unfortunately, our General Assembly shows little evidence of being interested in evidence-based policies. Nor, unfortunately, is it interested in putting in the work necessary to ensure its policies – even if misguided – are well-crafted to avoid unnecessary pitfalls. As a result, the only option for ESAs is a full repeal.

Kris Nordstrom is a Policy Analyst the N.C. Justice Center’s Education and Law Project.

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Kris Nordstrom
Kris Nordstrom

Kris Nordstrom is a Senior Policy Analyst with the North Carolina Justice Center's Education & Law Project. He previously spent nine years with the North Carolina General Assembly’s nonpartisan Fiscal Research Division.