by David Safier
A special session to create new private school tax credits is the big ed news right now. That puts one of the two main proponents of the bill, Steve Yarbrough, into the spotlight, because, as well as being a state representative, he runs Arizona's largest Student Tuition Organization (STO). (All tuition tax credits first go to STOs, which then give the money out as scholarships). The tax credit law states that as much as 10% of the money an STO collects can be shaved off for expenses, which is where Yarbrough's potential problems come in. It may be that he's taking out more in expenses than he should and using the money to pay himself and companies he owns to provide questionable services.
Yarbrough may be doing nothing illegal here -- as a lawyer and legislator, he probably knows the law pretty well -- but if things are as they appear, this conservative Republican who wants to shrink the size of government is doing everything he can to expand his own wallet at the expense of a government program.
A few weeks ago, someone gave me a heavily annotated, three inch thick binder filled with information related to Yarbrough's Arizona Christian School Tuition Organization (ACSTO). The key documents are the STO's tax forms from 2001 to 2007 (Because it's a 501(c) organization, the tax forms are public records). I was walked through the material, and I've looked over it carefully since -- with a layman's eye, since I'm not an accountant or a tax expert.
Here's what popped out at me.
- As Executive Director of ACSTO, Yarbrough receives an annual salary of
about $96,000. The tax form says the salary is compensation for 40 hours work per week. I suppose it's possible for him to work full
time as Exec Director of ACSTO and still maintain his duties as a legislator. But it wouldn't give him a whole lot of time to do anything else.
- Yarbrough is also a working lawyer, and under the title of Steven
P. Yarbrough, PC, he gets paid by ACSTO, which lists its legal
fees at about $60,000 per year. There's no breakdown of the legal fees on the tax form, so there's no way for me to know whether or not the entire $60,000 is spent on Yarbrough's legal services. It does seem strange, though, that the Executive Director working 40 hours a week puts on another hat and pays himself extra to offer legal counsel.
- Beginning in 2006, by far the biggest charge to ACSTO is "Processing Expenses": $363,620 in 2006 and $426,895 in 2007. In 2005, Processing Expenses are listed as only $24,440. Before 2005, there is no specific listing for the service. Interestingly, on October 21, 2005, Yarbrough incorporated a new business, HY Processing, LLC. The corporation is listed on ACSTO's tax return in 2006 and 2007, and the description of services in 2007 is, "Processing of scholarship requests and grants. Payments of guaranteed payments." Because the new six figure processing charges begin at the same time HY Processing is first listed on ACSTO's return, I'm guessing there is a direct connection, and most or all of the processing costs are flowing from ACSTO to HY Processing.
Yarbrough may give himself a somewhat inflated salary as Executive Director of ACSTO, and it may be a stretch for him to charge the STO extra for legal counsel. But the truly mouth-dropping charges are the $363,620 and $426,895 processing expenses which appeared out of nowhere in 2006 and 2007, at the same time Yarbrough created HY Processing.
There is a possible explanation why HY Processing and the new charges showed up when they did. In 2004, ACSTO received a total of about $7 million in tax credit money and listed about $500,000 in expenses, a bit over 7%. By 2006, its tax credit income had climbed to almost $11 million. Thanks to the new $363,620 processing charge, its expenses climbed to almost $1 million in 2006, which put its expenses at just under 10%. The figures are similar in 2007.
Every penny an STO brings in goes out as scholarships, except for expenses. While a for profit company has an incentive to lower expenses and raise profits, in this case, there is a perverse incentive to keep expenses at the maximum allowable rate, especially if that money can be spent in a way that benefits people connected with the STO. That's why the surprising jump in processing costs which made the expenses jump from $500,000 to $1 million raises suspicions about the way the money was spent.
ACSTO's expenditures are unusual enough that they should be looked into in greater detail. This is government money Yarbrough is spending, even if the tax credit legislation waylays the funding before it passes through the state house doors.Because he's spending the public's money, the expenses listed by Yarbrough's ACSTO deserve a public airing.