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How Cities Can Drive Economic Growth in Five Easy Steps

bwilson — Thu, 20 Mar 2014 17:00:11 +0000

Introduction

Nine cities have seen job losses near 10 percent and may never fully recover, including two, in the arid, oil-depleted part of Texas as well as two Nevada cities, and one each in California, Illinois, Connecticut, Georgia, and Michigan.⁴During the recession, the Phoenix-Mesa-Glendale metro lost more than 13 percent of its private employment and private employment is still more than 5 percent below its pre-recession peak.⁵ Phoenix’s finances suffered so badly, they found it necessary to impose a sales tax on food that persists to this day. Both Mesa, Arizona and Phoenix continue to suffer tepid growth in revenues with Mesa City Hall continuing a four-day, 10-hour per day public employee workweek to save on building maintenance and Phoenix having to adjust to yet another disappointing revenue picture.⁶

As a consequence of the recession and slow recovery, municipal governments are considering ways to strengthen their economies and become more business friendly in an effort to set their fiscal houses in order. A key ingredient is making city administration more efficient and less burdensome for businesses. Many theories about what government can and should do to make a city attractive to investment and job creation distract from focusing on what must be done. One theory promotes the clustering of certain similar businesses, such as biotech.⁷ Another related theory involves the clustering of certain classes of workers, particularly “young creatives.”⁸ Still others focus on sports amenities and tourism venues. Time and again, though, research shows that when seeds of development fall on fertile soil, they grow, naturally and organically, the fertile soil being favorable institutions.⁹ These include privatization, procurement reform, transparency, deregulation, and personnel reform. By keeping taxes low and making cities flexible enough to quickly adapt to economic fortunes as they are influenced by the entire globe, these measures lead to wealth creation and healthy economic development.

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For example, the city of Phoenix recently enacted reforms that have made the city friendlier to new business. These reforms included some zoning simplification, but the real accomplishment has been in streamlining construction permitting, especially when remodeling existing business space. Effectively, the city has privatized construction permitting for certain projects by certifying architects to act as surrogates for city plan reviewers. The city calls this the Self-Certification Program. Architects can self-certify certain construction, landscape, grading and drainage/storm water, and parking lot plans.¹⁰ The results have been satisfying. There are 203 professionals allowed to self-certify projects. Since its inception, the program has seen 450 projects and 550 permits issued under the self-certification program with a project value of $450 million.¹¹ The self-certification program could have easily saved a month in bringing these projects to fruition, translating into savings of $3 million.¹² Even marginal reductions in cost of investing in a city can make it significantly more attractive for investment.

Cities have other opportunities for reform that can drive economic development and create jobs. These reforms include privatizing municipal services such as garbage collection and park maintenance. Cities should move to an at-will system of employment and do some modest reform of procurement policies. They can also move to a defined-contribution retirement benefit for new city employees who would fall under the city’s independent pension system. Reducing onerous small business licensing requirements, streamlining requirements for minor construction and remodeling permitting, and eliminating plant salvage requirements for new development would also do much to help businesses thrive. Finally, cities should carefully review and narrow their functions to core competencies.

1. Privatizing Services

Privatization does not mean the elimination of publicly-provided services. In fact, privatization can sometimes preserve the public provision of services by making them more affordable. Many city services can be contracted out to private companies who meet specific cost and performance requirements. Privatizing services can improve overall financial performance and improve government finances.¹³ Privatization is a superior driver of efficiency and cost savings through incentives that lead to better management techniques, more productive equipment, innovation, incentive pay structures, and efficient deployment of workers.¹⁴ This is because city administrators and taxpayers hold contractors responsible for performance without being concerned about union work rules and employees’ political connections when coupled with transparency policies. The benefits of contracting can be greatest when contracts are based on desired performance specifications (performance contracting) rather than contracting to have a job done a certain way, which is likely to be the way it’s always been done and which might be less efficient than how a contractor would choose to do it.

Privatize Trash Collection

Privatizing trash collection, in most cities, can save citizens 20 percent of their current trash collection costs.¹⁵ Detroit has turned to possible privatization of trash collection and has 10 bidders vying for the contract with the initial expectation that the city could save $15 million of its annual $50 million trash collection budget.¹⁶ Academic research has supported the notion that privatized trash collection is more efficient than traditional government-run trash collection.¹⁷

Privatize Park Maintenance

New York’s Central Park is privatized, supported by revenues from concessions and private contributions as are several other parks in the city.¹⁸ Complete privatization of parks that do not restrict admittance can be difficult, however. The unique parks of New York City rely on high-income contributors to non-profit administrators. That arrangement may be difficult to replicate. Minimally, though, landscaping duties such as mowing and basic grounds upkeep at other cities’ parks could be contracted to private providers. This would likely require bundling various parks in a rational way and contracting for upkeep of these bundled sites. Sports parks could be similarly contracted for trash cleanup and basic monitoring for upkeep.

Recently, Carlsbad, California, explored parks privatization opportunities and found that the city could save up to $4.7 million per year. Moreover, reducing responsibility for parks relieves the city of equipment ownership and upkeep. Personnel needs are reduced along with associated costs such as pension contributions and various insurances. Properly structured contracts with closely monitored performance criteria that focus on park appearance and functionality can produce the sort of efficiencies that lead to significant savings, just as privatized trash collection tends to do.

Privatize Golf Courses

Many cities own and operate golf courses, but only about 10 percent of the U.S. population plays golf and the sport’s popularity is waning.¹⁹ It is unclear why the other 90 percent should subsidize any city’s municipally-owned golf courses. The City of Phoenix has long owned and operated golf courses but in 2011-12 alone Phoenix city golf courses ran a $2.4 million deficit and have run an annual deficit since 1998-99 except for a single modest surplus year. Phoenix’s golf enterprise fund has accumulated a total deficit of $17 million.²⁰ City courses compete with private enterprise and generate no property tax revenues.

Golf course privatization alternatives include: 1) selling the courses with a proviso that they remain golf courses, 2) inviting proposals from private parties for lease/management contracts to run the courses, and 3) outsourcing golf course maintenance, as Phoenix is currently doing with five of the courses. The City of Tucson has seen the desirability of comprehensively privatizing municipal golf courses through lease/management contracts after seen million dollar deficits running the courses themselves.^21/22 In the case any city losing money on an amenity that is provided by private enterprise, if the three privatization alternatives fail to completely halt the financial bleeding, the courses should be sold.

Some might object that golf courses and other amenities are economically beneficial and that closing golf courses, even if they are subsidized, would be an unwise thing to do purely from an economically pragmatic point of view. However, economic studies purporting to show benefits from parks and golf courses show only that values of homes abutting and near parks and golf courses are more valuable than those further distant.²³This is hardly a justification for taxing everyone else to support a minority’s pastime.

Privatize Road Maintenance

Road maintenance can be privatized by making contracts with private companies to maintain roads to an objectively determined standard of smoothness and repair.²⁴ As an example of what can be accomplished, the state of Colorado recently privatized U.S. Highway 36 between Boulder and Denver to include maintenance.²⁵While cities do not administer highways, they can designate particular areas for privatization, perhaps initially as a pilot program. City road contract administrators would need to set performance standards of ongoing smoothness and repair in addition to standards of street quality to be met at the end of the contract. Performance contracting involves determining penalties for lack of performance and timeliness as well. Typically, such contracts are for terms of around five years and involve soliciting bids according to performance measures and yearly fixed rates the city would pay. Countries around the world have already implemented performance-based contracting in road maintenance, and parts of the United States are already seeing savings between 10 and 15 percent.²⁶

Figure 1: Annual Local Government Expenditures by City Services

Source: US Cencus Bureau, 2002-2011

Privatize Transit

The privatization of transit has shown itself a viable, effective option when cities make room for it. Private bus and van service presents itself as a solution, without direct government action, to urban transportation problems that occur in cities all over the world. The United States has seen these services spontaneously arise repeatedly in cities when highly regulated taxi services and government-provided mass transit underserve some areas.²⁷ Private transit can be relatively unobtrusive since the vehicles used are relatively small and nimble. Such services can stop briefly in front of peoples’ houses rather than cutting off a lane on city arterials as passengers disembark and embark. Also, routes are flexible, not fixed to a rail line or even necessarily a fixed schedule. Service can accommodate a variety of tastes and price points as well, by adjusting service such as number of interim stops, vehicle accommodations, and the number of fellow passengers. Finally, private transit creates economic opportunities for low-income individuals to provide the service by becoming drivers and even eventually owning their own fleet of vehicles.

High-end driver services like Uber, Lyft, and Sidecar have proven that more personalized, private transit services are in demand.²⁸ All three use smartphone software to match people needing a ride with private individuals willing to provide a ride in their personal vehicle for a fee. Uber operates in 36 U.S. cities as well as in cities in 26 countries. Lyft operates in 20 U.S. cities, often in competition with Uber. These services use technology and driver and rider reviews to ensure safety and quality of service without the heavy hand of regulation. The same technology that matches single riders with rideshare-service-affiliated drivers could be used to more efficiently route less expensive van services for multiple riders and already is being used, to some extent, for airport shuttle services and taxis. The technology could be more widely applied and even better developed for inexpensive van services but for the concern that transit authorities might interfere with these services’ development, as they have in various cities, and the fact that public transit is subsidized, making private van services all the more financially risky.²⁹

As private transit is accommodated, steps should be taken to phase out standard public transportation, including buses. Low-income riders can be assisted more efficiently with their transportation needs using an income-based transportation voucher system in a city with privatized transit.

2. Reforming Business Processes

Cities can reap great savings and become more efficient, making lower taxes possible, by streamlining several of their business processes. First, moving all employees to an at-will status can enhance productivity while saving money. Second, procurement processes should be reviewed to ensure transparency and competitiveness.³⁰ Another reform includes eliminating business preference programs that add layers of government without adding value for taxpayers and citizens.

Employment

Civil service protections, in an age of transparency, are arguably outdated and unnecessary. Communication, technology and the availability of informational outlets makes it possible for anyone treated unjustly to make their case known. Public knowledge of unfair practices on the part of a public employer creates a discipline all its own. Yet, many cities still follow civil service practice by granting what is, in effect, tenure for employees after only a short time of satisfactory employment. In Phoenix, as in many other cities, if an employee is evaluated after her first year as a good employee, she has the right to appeal demotion and termination decisions.³¹ The Phoenix Civil Service Board has overturned or modified as many as a third of personnel discipline actions. It takes a number of steps to terminate the employment of someone who has shown even egregious behavior.³²

Moving to an at-will employment policy along the lines of that promulgated by the Texas Municipal League would free cities from extended, costly employment proceedings.³³ In 2012, the State of Arizona made this move, making all new employees subject to at-will employment with the exception of public safety personnel. Under the new law, supervisors are to adhere to a set of six principles that are intended to protect both taxpayers and employees from arbitrary managerial decisions and ensure that the best employees are retained and advanced.³⁴ Couple that with other state and national laws that prohibit discrimination and protect employees from repercussions for engaging in free speech, city managers would still have to document employees’ poor performance in order to impose discipline.³⁵ However, it would be far less likely that it would take years to terminate a problem employee.³⁶

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The benefit to taxpayers of moving to an at-will system would include savings from the removal of deadwood from public employment and improve service from city employees. The cost savings from not having suspended employees on the payroll could immediately save hundreds of thousands of dollars per year. Additional savings would accrue from preventing their accumulation of pension benefits. Finally, some savings will accrue from a more streamlined (but not eliminated) system of due process for non-performing employees.

Procurement

Municipal procurement policies typically require bids to be sealed, opened in public, and judged by a committee. There can be conflicts of interest in the bidding process, however, if the writer of the request for proposals (RFP) has been involved in similar projects and worked with the same vendors over a period of years. The writer can strategically construct a grading rubric that leads to a specific contractor being chosen even if committee members are unaware of any ulterior motives.³⁷ For these reasons, municipal contracting should be as transparent as possible. The following steps will help cities achieve fairness and transparency.

Tell Losing Vendors Why

When an award is made it should be accompanied with an explanation of why the vendor who received the award prevailed and specific reasons why other bidders did not. Some might fear that such an explanation from the city’s selection committee would hand ammunition to rival bidders who might sue if they see a decision as arbitrary. It is important, therefore, to not only make sure the decision is not arbitrary but to make sure proposal selection committee members are qualified to make such judgments. Then, the explanations must be clear and concise. In the end, the city might find that vendor bidding becomes more competitive because vendors will have a basis besides guesswork on which to improve their offers.

Write Performance-Based Specifications

Specifications can be too specific. A good example is Phoenix’s specifications for underground water pipe. They specify metallic pipe, which corrodes and eventually leaks. Other types of pipe such as PVC may have longer life and lower maintenance costs. Instead of specifying metallic pipe, Phoenix should specify in its RFP that the material should be suitable with a demonstrated low life-cycle cost. Even if the initial cost is a little higher, if the life-cycle cost is lower, that material should win the bid.³⁸ Other examples might include the specification of only certain roofing materials for a building when the real issues are pleasing aesthetics and longevity, specific personnel qualifications when general qualifications would be sufficient, and the specification of certain brands of materials. Strategies too focused on specific elements are risky, not only for taxpayers’ wallets and government efficiency, but legally as well.³⁹

Writing specifications that accurately describe the problem to be solved or the task to be accomplished or the purpose of a good or service is key. These performance-based measures allow firms to innovate and propose those innovations in their bids. Contract selectors generally have, or should have, the discretion to weigh a proposal’s risk, likely performance levels of bidders, their expertise, experience and practices, and the types of processes or materials they propose to use as well as other intangibles along with cost so that the lowest cost bid is not automatically the one selected if it involves achieving less than the best value for taxpayers.⁴⁰

End Business Preferences

Many cities have instituted local business bid preferences to give local businesses a bid advantage on city procurement contracts. Tucson, Arizona grants businesses a 5 percent cost preference in bidding on city contracts. That is, their bids will be evaluated as if they bid a price 5 percent less than they actually bid. This could apply to any size contract. The Arizona cities of Chandler, Mesa, and Tempe offer bid preferences between 1.5 and 2 percent on contracts under $50,000.⁴¹ The City of Los Angeles has a program for small and local businesses that gives them a 10 percent bid advantage.⁴²The State of Texas has a statewide bid preference policy that both allows for such preferences but also sets limits for cities and school districts.⁴³ The City of Chicago instituted a 2 percent local bid preference in 2012.⁴⁴ These programs are ubiquitous throughout the United States.

The City of Phoenix has two programs designed to give advantage to local businesses. The Small Business Enterprise program encourages larger businesses to subcontract with local businesses where city contracts exceed $50,000. The Local Small Business Enterprise program reserves contracts worth less than $50,000 for local small businesses when three or more local businesses make a bid for a contract, regardless of whether a lower bid is made from a non-local business.⁴⁵ Phoenix’s programs replaced earlier programs that worked more like those of other cities. The current programs seem designed more keep city employees with busy work than anything else.

All bid preference programs fail to minimize costs to taxpayers. Contractors who win a bid due to a bid preference provide no qualitative advantages since the preferences often apply only when two contractors are otherwise substantially similar. The only argument that can be made for such preferences is that they might keep tax monies local. Some regional economic models appear to make the case that keeping money local is economically beneficial, but this is really an argument against trade in general. Historical economic evidence proves that trade within and outside borders is always economically beneficial. Long-discredited Mercantilistic economic philosophies to limit trade outside certain borders were disproved even before Adam Smith wrote his famous tome, The Wealth of Nations, in 1776. Not only do these programs add costs for taxpayers, the added costs result in a redistribution of income from taxpayers to favored small business owners. And, the best quality of service and goods for taxpayers may not be attained. Finally, as is being increasingly demonstrated, these programs only foster more of the same in other cities as they compete to protect their local businesses and ultimately have a deleterious effect throughout the region and nation. Therefore, local business contract preference programs should be scrapped.

3. Defining and Concentrating on Core Functions

A key element in making cities attractive to business is to ensure governments focus on core functions and performing well. What many would consider core functions, such as providing roads and sewer, are very important to business formation and growth. By focusing on these functions, costs can be minimized and, in turn, taxes kept low, delays in construction minimized, and businesses can focus on doing business. Although a recent report based on surveys of entrepreneurs with fast-growing businesses makes the case that taxes and regulation are not a major factor in location decisions, the fact that these are relatively small businesses in fast-growth industries seems to be lost on the authors.⁴⁶ There is no denying the general trend of companies and people moving to generally less-taxed and regulated cities and states.⁴⁷

Determining what is a “core function” can be difficult and open to debate. Any determination of core functions must recognize that no government can possibly be all things to all people and do everything well. Government must be limited to those functions for which it is best suited and that are necessary but unlikely or impossibly accomplished through private means. Such endeavors as city-owned hotels, city-controlled development, city-financed art, and city-sponsored sports (like golf) are suspect. Core functions are likely to include police, some kind of provision for fire-fighting and emergency response, roads and other basic infrastructure like sewer and water.

There is a great deal of dispute regarding what constitutes core functions of different levels of government.⁴⁸ Many clearly consider providing for health and welfare with government furnishing medical services, food, shelter, and other services to those in need a core function. Others do not. Certain criteria for determining core city functions readily present themselves if one presumes that individual liberty is to be preserved to the highest possible degree. Questions to be asked and answered in the affirmative to determine if a function is core include: 1) Does everyone inarguably benefit?; 2) Do overall benefits outweigh overall costs?; 3) Is it necessary in order to prevent damage to lives and property?; 4) Is it necessary to allow for travel, trade, and access to property?; 5) Is it necessary to protect overall health and welfare?; 6) Is it necessary for one of these purposes but the private sector cannot otherwise accomplish it? One question purposely not asked is “Does it make me feel better?” That mentality forces cities to take a subjective approach instead of focusing on results. Since everything the government does is the result of coercive taxation, its results must be objectively beneficial to all.

These questions must be constantly asked and answered. Something once considered a core function might fall out of favor later or vice versa. One key to an ongoing understanding and consensus regarding core functions is to adequately understand their costs. This means a city must keep its finances in order and transparent so that the citizenry can understand those costs and make informed decisions.

4. Putting and Keeping City Finances in Order

When it comes to city budgeting and finance, two issues stand out as ripe for reform. First is pensions. Many municipal pension funds are struggling, and cities face huge liabilities. Across the country, state and local unfunded pension liabilities are estimated at $3 trillion - $10,000 for every man, woman and child in the nation.⁴⁹ Phoenix’s unfunded pension obligations alone amount to around $1.4 billion. Tucson’s are about half a billion dollars.⁵⁰ Phoenix and Tucson carry per-capita pension costs that exceed those of bankrupt Stockton, California.⁵¹ The other issue is transparency, which would include creating searchable databases of city transactions.

Pensions

The central problem with pension funds is that they are inherently risky for taxpayers. First, present and past employees are guaranteed lifetime benefits, putting the onus of funding said promises on taxpayers. In many cities pension funding has become the highest priority in government budgeting. Many states have provisions in their constitutions like Arizona’s that effectively declare pension benefits sacrosanct and prioritize pensions over every other type of spending.⁵²Second, pension systems contribute to “fiscal illusion” that adds risk for taxpayers. For example, early retirement schemes that appear to save taxpayers money during recessions actually push the added costs of early, previously unanticipated retirements to later generations through the pension systems. Lawmakers are constantly adding benefits that appear affordable, often pushed to do so by active employees and their unions, only to set up taxpayers for the inevitable day that investments’ values fall. Third, pension systems are inherently corrupting and corruptible, as pension spiking schemes in Phoenix and elsewhere have demonstrated.⁵³

Stockton, California, and Detroit have both declared bankruptcy, in no small part due to their pension obligations.⁵⁴ Policymakers in these and perhaps hundreds of cities around the country, succumbed to public employee pressure to increase pension benefits without any increases in pension funding. During the 1990s, pension funds were seemingly awash in an endless ocean of cash and often more than 100 percent funded. Pension benefit increases such as increased retirement multipliers, like the early retirement Rule-of-80, and double-dipping programs that allow nominally retired employees to earn salaries at the same time they receive pensions looked like no-cost ways to effectively increase government employee pay. The inevitable day of reckoning first came with the relatively modest recession in 2000, but before pensions could fully recover from that shock, the even bigger recession of 2007 hit.

Stockton appears to be coming out of bankruptcy, but still without confronting the pension issues. Taxpayers have suffered a tax increase in a city already hard-hit economically, and bondholders have been moved to the back of the creditor line.⁵⁵ After a federal judge determined that pensions were subject to reductions under Detroit’s bankruptcy, political battles to keep that from occurring continue to rage.⁵⁶ In both cases, taxpayers are left holding the bag either through reduced services or higher taxes now and in the future as borrowing costs rise and the financial holes in the pension systems are filled. Just 61 cities in the United States had a total unfunded pension liability of $99 billion, according to the Pew Charitable trust.⁵⁷ City finances will continue to suffer with forcing them to make personnel reductions in police and firefighting and to neglect infrastructure needs.

Cities can avoid these potentially devastating problems by moving away from pension (defined benefit) retirement benefits and toward 401(k)-style (defined contribution) retirement benefits. Taxpayers would only be liable for one-time, per-pay-period contributions to employees’ personal retirement accounts. Employees would have control over their accounts, which would be their exclusive property. In San Diego, a proposition to move public employees into defined contribution retirement benefit programs won overwhelming voter approval with 66 percent of the vote. In San Jose, California, major changes to the pension program to lower its costs passed by proposition with 69 percent of voters approving of the change. The benefits of such changes will take a long time to come to fruition, but they are worthwhile in order to secure the longterm financial viability of cities.

Financial transparency

Ensuring fiscal transparency can help cities streamline processes and reduce fees and taxes, all of which create a more hospitable business environment. With greater transparency, managers have more information at their fingertips and know that there just might be somebody looking over their shoulder. This encourages more careful decision making as watchdogs have a better chance of discovering inefficient government activity. Transactions should be posted online and include explanations in plain language of the purpose of each transaction. Accounting codes and categories are insufficient. Those who input the data would have to be counseled on appropriate privacy issues where necessary and coached on the proper balance between brevity and adequacy in the explanation. All such information should also be entered under oath.

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As noted above, city pension systems currently present the greatest financial threat to communities. Total traditional debt carried by the city can be determined from a city’s Comprehensive Annual Financial Report. However, total debt, including general obligation bonds, revenue anticipation bonds, and unfunded obligations for pension systems should be prominently posted. And gross amounts should not be the only posted numbers. Per capita debt should be included because taxpayers deserve to know how much they and their children are obligated to pay to other parties, especially when they are constantly asked to approve measures that create even more debt.

Taxation & Revenue

Good tax policy is not just about keeping taxes low. It is also about keeping taxes from fundamentally determining economic decisions and outcomes. Income taxes fundamentally discourage work effort, investment, and risk taking. Property taxes discourage investment. Sales taxes would seem to discourage consumption except that much consumption will take place, regardless, due to necessity and people’s natural desire to consume. Of these three types of taxes, sales taxes distort the economy the least if they are equally applied to all goods and services. In most instances, property taxes are the most stable form of revenue. However, the income tax is the least stable and does the most to negatively impact economic activity.

To the extent that cities have discretion over their revenue sources, they should emphasize sales taxes over the others. To the greatest possible extent, city services should be provided self-sufficiently through fees. Property taxes make some sense as sources of revenue for local roads since road use is somewhat related to property wealth, but by all means, cities should resist instituting a local income tax.

5. Reducing Regulation

Licensing

In general, city business licensing is best characterized as registration and most cities in Arizona are not particularly heavy handed with business regulation except with respect to zoning laws. Of interest, though, is the disparity in the fees among the different types of licensed businesses. Some businesses are more favored than others. Taking Phoenix as an example, application fees for amusements are over $100 per game.⁵⁸ Address curb painters pay $30.⁵⁹ Massage businesses pay $550.⁶⁰ Street vendors pay $150.⁶¹ Yearly renewal fees are lower for most businesses but similar disparities apply. Other cities show similar inequities.

All cities should review their business application and renewal fees for their necessity and rationality and consider whether occupations like curb painters and auctioneers should be regulated at all, even through mere registration requirements. In Phoenix, curb painters are regulated to the point of specifying the materials they should use despite the fact that homeowners are capable of evaluating them.⁶² Cities should review whether business permits and regulations are necessary.

Figure 2: Number of Licenses/Permits/Tax Registrations Required by City for Selected Businesses

Source: License123 website, https://www.license123.com/Businesses

Figure 2 shows the number of licenses and/or permits and/or tax registrations required of various businesses in a sampling of cities around the country. Some of the paperwork is required by state regulation and tax collection, but as illustrated by the disparities between Phoenix and Glendale, Arizona and between Los Angeles and San Francisco, clearly states are not the major culprits when it comes to requirements businesses must meet in order to open their doors.

Figure 2 confirms anecdotal evidence that Texas tends to be more lenient on business regulation than most. The number of filings required for this sample of businesses in Dallas averages less than seven, the lowest of the sample cities. It also confirms that San Francisco is particularly hostile to business with the average number of filings it requires at 15, a good deal higher than Los Angeles’ 9.2. In this sample of nine cities and according to the averages, Glendale, AZ is the second most regulating city while Phoenix is in sixth place.

One must wonder just what disasters are occurring in Dallas that the other cities in the list are seeking to avert. It is also interesting to see that although Phoenix ranks below New York in its business paperwork requirement overall in this comparison, Phoenix is worse than New York in its requirements on food trucks and family restaurants. Dallas serves an example of why cities should constantly review their business licensing and permitting requirements to see if they are more onerous than can be justified.

City licenses and permits should especially be reviewed for their job killing potential. What may seem like an innocuous regulation that appears to be simple common sense can practically kill a business. Phoenix serves as an example. A ubiquitous summer feature in many cities outside Arizona is the seasonal snow cone stand. These are often small, portable, temporary buildings built on skids or trailers located in a spot for the duration of the summer.⁶³ But they are essentially non-existent in Phoenix despite the very hot summers. The reason for this likely lies in the city’s mobile vending licensing law.

According to Phoenix law, any “stand” “designed to be portable and not permanently attached to the ground” constitutes a “mobile vending unit” if anything is to be sold from it.⁶⁴Snow cone stands meet this definition. Phoenix law requires that mobile vending units on private property be “removed from the site during the hours of non-operation” and mobile food vendors are not allowed to operate between the hours of 2:00 am and 6:00 am.⁶⁵ In other words, in the City of Phoenix the law specifies that a classic snow cone stand or any other business operating in a similar manner cannot operate using a common business approach that prevails in other cities. Moving a temporary building, even one the size of a snow cone stand, every evening would be prohibitively costly.

This law, which essentially prohibits very small startup food businesses, limits upward income mobility. It prevents entrepreneurial activity that was once the backbone of the vibrant American culture of pulling one’s self up by dint of hard work and risk-taking. It is not at all clear why the city insists that relatively temporary structures be removed in the night except that this rule helps to prevent competition for what might be considered more permanently established businesses. City law also favors food service in permanent structures by prohibiting anyone from managing more than one mobile vending unit at a time and requiring that a mobile vending licensee have a permanent Phoenix resident as an agent.⁶⁶

Minor Home Maintenance Permitting

Cities often require residents to obtain permits and inspections to replace gas appliances, replace roofing, perform minor rewiring, install landscaping and irrigation systems and construct small out buildings on their property.⁶⁷ Construction requirements often concern zoning regulation such as setback requirements. Others are due to alleged safety concerns. Much of the time, cities act as third-party experts on behalf of homeowners who otherwise know very little about basic construction, wiring and plumbing. In any case, there is a significant potential for safety and quality issues to arise if work is done improperly and the city is attempting to prevent problems.

Data pointing to the benefits of permits and inspections for remodeling is scant, however. Moreover, today there is less of a need for third-party experts as there is a great deal of information about proper construction on the internet and through home improvement centers. Many cities in Arizona have abandoned many of their permit requirements or have created exceptions for two reasons. First, there are obviously too few permits being issued in comparison to what one would expect. That is, clearly, residents are opting not to obtain required permits. The City of Chandler, AZ, for example, gets fewer than a thousand permits per year to replace water heaters when the number of permits should be several thousand per year. This leads to the second reason for eliminating this and other permit requirements. Despite the dearth of permits, houses are not catching on fire and water heaters exploding in the City of Chandler or other cities in Arizona. It turns out homeowners are not as ignorant as permit requirements seem to assume.⁶⁸

Regardless of the magnitude of permit and inspection fees, the steps involved in obtaining them take time, which is a cost in itself. A homeowner doing minor rewiring or installing a ceiling fan for the first time also has to deal with the invasion of privacy that permits and inspections entail. With these inconveniences, it’s highly unlikely that even a majority of do-it-yourselfers bother to obtain a permit. Do-it-yourself homeowners concerned about their lack of knowledge can hire inspectors if they wish.

Permitting does not just impact do-it-yourself projects. It also impacts the cost and inconvenience of hiring a contractor. Consequently, homeowners are less likely to have work done or will delay it, depending on its nature, partly based on the time and expense of permitting. Although permitting costs and delays might seem minor, they do marginally negatively affect economic activity and are one more potential reason someone might choose to live elsewhere.

Conclusion

Municipal governments learned hard truths during the recent recession. Some in other states have even had to declare bankruptcy, and are losing jobs, businesses, and citizens. The key to revitalization lies not in giving favors to specific industries, but in creating a climate favorable to all business development. Streamlining government processes, reducing regulatory burdens, and improving government transparency are simple steps cities can take to get on the path to balanced budgets and economic growth.

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References

Cities across the country struggled through the recent recession, and several even declared bankruptcy, including Stockton and San Bernardino in California, Harrisburg, Pennsylvania, Central Falls, Rhode Island and, perhaps most famously, Detroit, Michigan. Stockton’s decline has been harrowing as its finances have so declined that essential services, especially the police, have been reduced. The city’s gang and narcotics teams had to be disbanded even as the city saw its murder rate hit an all-time high in 2012. The city is learning to fight back with help from the county sheriff and changes to its policing methods, but real long-term damage has been done to its reputation. Even before its bankruptcy, Detroit had a plan on the table to reduce costs by demolishing abandoned houses and commercial buildings. The city’s decline has been so thorough that it has been used as an example of what happens to buildings in its Life After People series.Monday, May 12, 2014 - 09:55Driving Economic GrowthHow Cities Can Build Incentive for Business CreationCity & Local Reform Business & Job Creation Government Accountability Government Red Tape In the News Report Policy ReportYes PHXXXX.pdf Pages from PHXXXX111.pdfBy TopicsByron Schlomachtrue

Public Money for Private Gain: Legal Strategies to End Taxpayer-Funded Union Activism and Pension Spiking

bwilson — Mon, 12 May 2014 16:53:21 +0000

While private-sector unions are shrinking, public-sector unions aren’t retreating quietly, however. Public-employee unions play an outsized role in electing state and local officials with whom they then typically bargain behind closed doors over wages and benefits. These unions are leveraging that power to push back against right-to-work and implement policies known as release time and pension spiking.

Governments at every level allow their employees to take “release time” from their regular jobs to serve as union representatives. But this is no mere “release”—in many instances governments pay public employees their normal salaries and benefits, even though they are actually working for the unions. Public employees use release time to negotiate higher wages and benefits, to file costly grievances against their employers, and even to engage in electoral politics and lobbying—all at taxpayer expense.

Pension spiking is another tactic public unions frequently employ in right-to-work states. While the vast majority of private-sector employees have defined-contribution plans if they have retirement benefits at all, far more costly defined-benefit plans remain commonplace in the public sector, placing enormous strains on state and local budgets. This fiscal strain is exacerbated by the practice of pension spiking, which adds benefits such as unused vacation and sick leave to the base salary for purposes of calculating lifetime pensions. Spiking can inflate pension payouts exponentially.

This how-to guide details tools the Goldwater Institute has developed to protect taxpayers and government budgets from the strain of release time and pension spiking. These tools are available in nearly every state, and some of them can be applied even at the federal level.

Introduction

Imagine a city council contacting a local McDonald’s and saying, “We want to donate city workers to your business. The city will keep paying their salaries, but they will be your employees. Put them in McDonald’s uniforms, make them sell hamburgers—the city doesn’t care. They’re yours.” After the initial shock, the McDonald’s owner would no doubt respond, “I’m lovin’ it!”

Sound far-fetched? Unfortunately, this type of government handout happens every day. But instead of fast-food, the beneficiaries are public-employee unions. Under a practice called union “release time” (or “official time”), governments allow public employees to leave their jobs and go work for their unions. And all the while, taxpayers continue to fund the employees’ salaries and benefits.

This means that when unions dispute salaries, file costly grievances, or drag out attack campaigns against city officials, taxpayers are paying for both sides of every fight.

Now imagine that after closed-door negotiations with an employee union a city council added several provisions to its union contract allowing city employees to save up and then cash in unused sick leave, vacation leave, overtime, and other benefits during their last few years of employment. These accrued benefits would dramatically boost the baseline for pension payouts because pension benefits are based largely on the employee’s final salary at the time of retirement. Thus, any employee who took advantage of these provisions by saving up leave or working overtime could inflate their pensions by huge amounts in perpetuity.

Also sound unlikely? Unfortunately, this practice of “pension spiking” is occurring throughout the country at extraordinary costs to taxpayers. The practice is undermining the fiscal health of governments because they cannot budget for spiking since they do not know which employees will take advantage of these provisions. Moreover, employees who have worked the same number of years and retire in the same position receive grossly different pensions. In the city of Phoenix, Arizona alone, police officers who took advantage of these provisions had pensions nearly twice as high as those who did not. The pension costs in the city for just one group of employees have risen 1,500 percent in 10 years—from $7.2 million a year in 2003 to over $107 million in 2013.¹

This publication provides legal tools to challenge these union abuses.

Read the Full PDF Report here

PART I: RELEASE TIME

What is Release Time?

Release time is negotiated as part of the “collective bargaining” or “meet and confer” contracts between public employers and unions. Release time comes in many shapes and sizes, but it can generally be distilled down to three types.

The first is full-time release, which lets public employees leave their jobs completely to do solely union work. They report to union headquarters and their government supervisors do not know where they are or what they are doing, yet they receive full pay and benefits, including pensions, from the government employer.

The second type is a bank of hours, which gives unions a certain amount of hours that can be used for a wide range of union activities. While using these hours, public employees can leave their jobs during a shift and do whatever the union wants, including preparing grievances against the government employer.

The third type is activity-specific release time, where the government tells the union they can use public employees to perform a certain activity. Activity-specific release time can come with unlimited hours (such as unlimited hours for contract negotiations with the government) or a cap (such as 200 hours for union conferences).

The activities performed by employees on release time are varied, and often bear no resemblance to the duties for which the employee was hired. Moreover, in many instances, release time employees engage in activities that are often at direct odds with the interests of their public employers.

For example, release time is used to campaign for candidates for public office and lobby legislative bodies on bills (in many cases taking positions on legislation that is contrary to the employer’s position). Taxpayers are, therefore, funding the political activities of a private organization that may be advocating for legislation with which many taxpayers vehemently disagree.

Additionally, release time is commonly used to initiate and file grievances against the public employer. This is tantamount to a company paying several full-time employees to petition other employees to file complaints against the company that the company must then resolve.

Release time is also regularly used to negotiate over wages, benefits, and other conditions of employment. In these circumstances, a public employee, being paid public wages, is negotiating for private benefits against another public body. When release time employees use release time to negotiate over wages and benefits, taxpayers are literally funding both sides of the negotiation with no seat at the table themselves.

Release time provisions in contracts are usually hard to spot. Unions draft innocuous language that many government officials gloss over. For example, the union contract between the City of Phoenix and the Phoenix police union created six full-time release positions by burying this language in a contract:

The six (6) full time release positions shall be sworn, full time, paid police officers of the Phoenix Police Department, who will at all times remain qualified to perform such duties as are normally expected and required of a municipal police officer in the City of Phoenix, Arizona. These six (6) full time release positions will receive their regular salary including fringe benefits, and the employer shall make all employer contributions to the Public Safety Personnel Retirement System required by law so as to maintain their full eligibility under the Public Safety Personnel Retirement System.²

It would be easy to pass over this language without realizing what it was truly creating. In fact, more than one Phoenix council member has stated that’s exactly what happened during their contract negotiations.

Release Time at All Levels of Government

Release time is practiced at every level of government—city, state, and federal. In Los Angeles, for example, the police union is gifted nine of LA’s finest to do nothing but union work.³ Michigan permits release time at the state level for Michigan State Police.⁴ The federal government permits release time (“official time”), under 5 U.S.C. § 7131, where, in one example, the chronically understaffed Department of Veteran Affairs reported granting nearly a million hours of release time in one year, at a cost of over $42 million to taxpayers, all for union activity.⁵The practice is pervasive across the country.⁶

Estimates are that the total cost of release time in the U.S. is $1 billion per year.⁷ In Phoenix alone, the cost is approximately $3.7 million annually.⁸

Constitutional Challenges to Release Time

The Goldwater Institute filed a constitutional challenge to release time in Phoenix specifically targeting the contract between the city and the local police union. The police union contract was the focus of the lawsuit because it had the most egregious amounts of release time of all of the city’s union contracts and it diverted resources from one of the most important functions the city provides.

In a significant victory, on January 24, 2014, Maricopa County Superior Court judge Katherine Cooper ruled in favor of taxpayer plaintiffs, finding release time unconstitutional, enjoining the practice in the contract with the police union and urging its application to all other public unions in Phoenix.⁹ The case is currently on appeal.

Although not every bad policy can be challenged as illegal, we have found that release time can be challenged under three different constitutional provisions: state gift clauses, state right-to-work clauses, and the First Amendment.

State Gift Clauses

Forty-seven state constitutions have what are known as “gift clauses”—some are called “anti-gift clauses” or “anti-donation clauses.”¹⁰ Generally, these clauses state that governments cannot give financial subsidies to private organizations. The Arizona Constitution’s gift clause, for example, reads, “Neither the state, nor any county, city, town, municipality, or other subdivision of the state shall ever give or loan its credit in the aid of, or make any donation or grant, by subsidy or otherwise, to any individual, association, or corporation….”¹¹ Prevailing case law allows for two-side, arms lengths transactions, but subsidies are not permitted.

Those challenging release time based on constitutional gift clauses will need to examine their state’s gift clause and the associated jurisprudence to determine what types of government expenditures are banned. For example, the following inquiries may be important when performing a gift clause analysis based on Arizona’s gift clause jurisprudence.

Public Purpose

The most common question under the gift clause is whether the expenditure in question serves a public purpose. In some states, such as Arizona, the public purpose question is only the first hurdle for a government entity in defending its expenditure. In other states, however, the government wins if it can show a public purpose.

This can be a difficult question because many states have interpreted “public purpose” very broadly, granting governments wide discretion.

The first place to look for public purpose is the contract itself. The issue is determining what the union is obligated to do for the public. The union may point to a host of activities it has done over the years while on release time, which have benefited the public, but the relevant question is: What is the union obligated, under contract, to do for the public?

Next, discovery can be conducted on what the union has actually done on release time. While it may be true that the union has done some things that benefited the public, it will have spent most of its time working toward its own ends (such as internal union meetings, filing grievances, union recruiting, political activity, etc.). A lack of accountability or limitations on the use of release time can make it difficult for governments to show a public purpose.

Unions may counter that representing a fellow employee in a disciplinary proceeding is a public benefit. Union members, however, pay dues in exchange for representation in disciplinary proceedings. Thus, when a union uses release time to fulfill legal obligations to union members, it is serving the union’s own private interests .

Finally, the public is best served when an employee hired to do a job actually does the job the employee was hired to do. Pulling employees away from their duties to perform union work is, therefore, a quintessentially non-public purpose. This is even more pronounced in the case of police officers and firefighters who, when they go on release time, stop protecting the public in order to start protecting the union.

Adequacy of Consideration

The next step in the gift clause analysis is adequacy of consideration. Adequacy of consideration examines whether the government is participating in a fair, two-sided deal, or giving away too much, such that the government expenditure amounts to a subsidy.

Cost

To calculate the cost of release time to the public, simply multiply the total number of release time hours by the cost of each employee hour. The memorandum of understanding or employment contract will generally specify the total number of release time hours authorized. For example, if the contract grants the union one full-time release position at 2,080 hours per employee per year, and a discretionary bank of 500 hours, the government is giving 2,080 + 500, for a total of 2,580 annual release time hours.

Some provisions, however, grant unlimited amounts of release time. They rarely include the word “unlimited.” Instead, they may look something like this one from Phoenix (which we verified granted unlimited release time by conducting depositions):

Up to two [Association] representatives may, when the Association is designated by the unit member as his representative, attend mutually scheduled grievance meetings, Use of Force Boards, Disciplinary Review Boards, IRP Meetings, and hearings with department representatives and hearings scheduled and conducted by the Civil Service Board without loss of pay or benefits.¹²

After calculating the total number of hours, look to the cost of each employee man hour. Averaging the annual cost of each employee eligible to use release time, and dividing it by 2,080, gives a rough estimate of the cost of each release time hour.

The government may provide a total cost of release. This total cost must be carefully evaluated for elements of release time that may not have been included. For example, Phoenix was calculating the cost of release time without considering the unlimited hours granted for representation in disciplinary proceedings.

It is important also to consider incidental costs, such as the cost of hiring replacement workers or paying overtime for employee A to cover the work of employee B who left his shift to go on release time.

Reciprocal Obligations

The next consideration is what the union is required to do for the government in return for release time. Again, look to the contract itself for legally enforceable obligations. Beware of loose language that permits the union to do things (e.g., “The Association may represent unit members in disciplinary proceedings”) but does not obligate them to do so.

Generally, release time is granted without strings attached. Governments are loath to interfere in internal union business and in fact may not be able to do so under the law. Thus, they tend to shy away from restricting union functions, even on publicly-funded release time.

Next, consider whether the union’s obligations are pre-existing obligations. Many times, the union will include a no-strike clause that prohibits the union from striking. But striking by public employees is almost always against the law, so that cannot count as a legal consideration.

Similarly, if the contract requires union members to use release time to do something that the employer could have required the union member to do as an employee (without release time), then it is a pre-existing obligation that cannot count as consideration. For example, if an officer on release time is traveling to a union function in his uniform and patrol car then responds to a crime he witnesses, that action does not qualify as a public benefit provided by release time. The officer’s response to public safety is a pre-existing obligation as an employee of the police force, and does not legally justify the issuance of release time.

Further, in Arizona, “indirect” benefits are not counted as consideration for gift clause purposes. Hence, such niceties as labor/management harmony or efficiency do not satisfy this part of the judicial inquiry.¹³

Control

Another question that may arise, possibly falling under the consideration analysis, is the degree of control that the government retains over the expenditure—in this case the employees that go on release time.

In the Goldwater Institute’s case we discovered that full-time release employees reported to the union hall, did not report to a government supervisor, had the authority to resist any and all assignments from the government, did not have to undergo annual evaluations, and did not have to report their activities to the government. For employees on part-time release, the control was nearly as low, though at times they did have to report to their supervisor what activities they were going to do on release time before being allowed to leave their post.

Evaluation of Cost and Benefit

Finally, under the gift clause analysis, it may be relevant to determine whether the government is able to evaluate the benefit of the expenditure. Because governments chronically fail to account for how release time is used, they usually cannot determine whether the expenditure yields dividends to the government. If the release time employees are not required to account for how they use their time, then the government cannot determine the value.

However, it should be noted that even if the government can track what is done on release time, and even if the union does provide some public benefit, this should not supplant the more relevant question of what the union is specifically obligated to do for the public.

Union Defenses

Unions will typically defend release time by arguing something along the following:

Taxpayers do not pay for release time. Rather, the employees themselves bear the cost. When a union contract is negotiated, the employer gives the employees a large financial pie. And it is up to the employees to decide how to divide it. If employees choose to cut up the pie in a way that gives money to the union for release time instead of giving more money to their own salaries, then that is their decision. Therefore, it is the employees, not the public employers, who are paying for release time.

This argument has many shortcomings and did not survive judicial scrutiny in the Goldwater Institute’s legal challenge to release time.

First, if the government is still writing the checks to release time employees (which they are), then taxpayers are paying. Plain and simple.

Second, this argument mischaracterizes how negotiations typically work. The public union may try to argue that these employees have a right to receive a 1.5 percent increase in salaries and that the union has the prerogative to accept only a 1.4 percent increase in order to direct some money toward release time. Employees, however, do not have a guaranteed and finite “right” to anything during negotiations. Employees have no property interest in a prosed 1.5 percent salary increase. For example, if the 1.5 percent proposal were decreased to 1 percent during negotiations, the employees could not claim that .5 percent was stolen from them.

Thus, if the union does not have a property interest in proposed compensation, they cannot be said to be “giving” part of their compensation to the union during negotiations—they never had anything in their possession to give away. The only way release time can be “purchased” by employees is if they pay for it with their dues. Thus, the union cannot defeat a gift clause challenge by saying the union is the entity funding release time.

Right-to-Work Violations

If a union contends that the employees, rather than the government agency, are paying for release time, the union walks directly into a harmful legal admission in states that have right-to-work laws.

Dozens of states have enacted right-to-work laws, offering employees different levels of protection against coercive union practices, including the right not to join a union and the right not to pay mandatory union dues.¹⁴

If the employees themselves, rather than the government, pay for release time, then it means all employees bound by that contract are paying for release time. That includes employees who, if the state has right-to-work laws, choose to not be part of the union.¹⁵ But in many right-to-work states, employees not only cannot be forced to be part of the union or pay union dues, but they also cannot be forced to pay any type of financial compensation to unions. Therefore, if some employees choose to not be part of the union but are still having to give up pay and benefits to fund union activity (via release time), then their right-to-work protections are being infringed.

In these states, therefore, union defendants either cannot raise the “it is all part of the employee compensation pie” argument, or they will concede right-to-work violations. In such a case, representing non-union workers should bring release time to a halt, or at least require an individual opt-out.

First Amendment Challenge

In Knox v. SEIU, the United States Supreme Court ruled that non-union employees, who may nonetheless be represented by the union, must have an opportunity to opt out of supporting a union’s political activity.¹⁶

If employees are giving up part of their compensation to unions, then the employees are financially supporting any and all of the political activity that the union does on release time. Moreover, if the union is directing dues revenue toward political activity instead of to payroll costs (because the release time already covers its payroll costs), then it could be argued that employees are funding the political activity done with dues revenue as well. Such a prohibition might also extend to lobbying activities, including ballot measures, with which employees disagree.

Therefore, like the right-to-work issue, if unions argue that release time is part of overall compensation and paid for by all employees, and if the union uses release time for political activity, then there is a probable First Amendment violation. In other words, this “defense” simultaneously concedes a constitutional violation.

Legislative Activities

Prohibitions against or restrictions on release time can be enacted at the state level or added to city charters. Release time for school employees was banned in Arizona. Release time can be limited to certain specified purposes, the union can be required to reimburse the government for release time, or it can be prohibited altogether. The principle that all taxpayer dollars should be used for public rather than private purposes is an obvious one that already is reflected in many state constitutions through their gift clauses.

In Arizona, state legislative efforts to ban or limit release time at the city level were stymied by a handful of Republican legislators who believe public safety unions are Republican unions. In such circumstances, judicial remedies are essential.

Read the Full PDF Report here

PART II: PENSION SPIKING

Unfortunately, abuse of taxpayer resources does not end with release time. Pension spiking is yet another area where public unions and their collaborators in city hall are exploiting public compensation.

What is Pension Spiking?

Pensions for most public employees are based on a formula that includes the number of years worked and an average of the highest few years of salary preceding retirement. There is, therefore, both a time factor and a salary factor that each impact an employee’s retirement. The time factor is often categorized as years of service. The salary factor is referred to as final average salary.

For example, if an employee works for 20 years, and the employee’s final average salary at the end of his career is $100,000, then the employee may have a pension worth half that amount, or $50,000. If an employee is credited with working more than 20 years, or has a higher average salary during the last few years of employment, the employee’s pension will increase.

Pension spiking is a practice in which that formula is manipulated, either by artificially increasing credit for years of service (i.e., the “time factor”), or by increasing “final average salary” at the end of an employee’s career.

Pension spiking can occur in dozens of ways. For example, some state and local governments apply overtime hours to total years worked, thus increasing the time factor so an employee’s years of service are artificially increased. Other government agencies may permit their employees to include leave and allowances not ordinarily intended to impact retirement in their final years, thus increasing their final average salary and pensionable pay.

Most commonly, state and local governments allow public employees to cash in sick leave and vacation leave, often accrued over the course of an entire career, during the employee’s final few years. These lump-sum payments will then count toward the employee’s final average salary, increasing that employee’s pension payments. In addition to employees working large amounts of overtime for which they receive both regular salary and pension earnings, these items create the greatest bulk pension spiking costs.

Unfortunately, pension manipulations do not end with vacation leave, sick leave, or overtime. Uniform or clothing allowances, education pay, termination pay, longevity pay, training incentives, transportation allowances, and others have been added to the salary component.¹⁷ Amazingly, some public employees have even attempted to use wages earned while they are on release time to spike retirement benefits.¹⁸

Either to avoid statutes prohibiting pension spiking, or to obscure the practice, public agencies have also come up with crafty mechanisms to inflate employees’ final average salaries without directly cashing in accrued leave or allowances. Some governments permit employees to “convert” unused sick leave, vacation leave, and uniform allowances into salary during their final years of employment.¹⁹ In other words, rather than a lump-sum payment that counts toward retirement, employees can convert future vacation time, sick leave, uniform allowance payments, and other benefits into additional pay, thereby inflating the employee’s final average salary and pension.

As a result of these numerous pension manipulations, pension spiking is no longer a problem on the margins of the larger debate over unfunded pension liabilities.²⁰ It is rather a front-and-center example of the abuses within public retirement systems. And, regrettably, the practice is occurring in state and local public agencies across the country.

The most common forms of pension spiking – inflating final average salary by cashing in vacation leave, sick leave, and receiving pensionable overtime pay – are permitted by state law or judicial decision in at least 34 states, and very likely occur in many more cities across the country.²¹

Of course, given the large number of methods by which states and cities allow and obscure pension spiking practices, these numbers do not tell the whole story. In fact, this is state-level data for the three most common types of pension spiking methods only. More often than not, pension spiking occurs at the municipal level. And even at the municipal level, spiking may be permitted among one class of employees (e.g., public safety workers), but not among another class (e.g., administrative support employees). Further, pension spiking practices may not be codified in either state statute or municipal ordinance. Rather, they commonly appear in memoranda of understanding between municipalities and public labor unions.²²

Pension spiking in many municipalities has resulted in some truly outrageous outcomes.

In Phoenix, an assistant fire chief received an annual pension of $130,406 after exchanging $110,877 in sick leave, $14,528 in vacation time, and $43,152 in deferred compensation. In addition, the fire chief participated in a deferred retirement program that allowed him to receive $795,093 in cash at the time of retirement. After leaving Phoenix, the same assistant fire chief was hired by another city in Arizona as their fire chief, where he received an annual salary of $145,000.²³

In Allegheny County, Pennsylvania, a county jail employee inflated his final average salary from $56,000 to $140,000 per year by working large amounts of overtime.

As a result, the county employee walked away with a $92,000 pension, nearly twice his actual highest salary at the time of retirement.²⁴

In one particularly troubling case, retiring workers in the Contra Costa, California Sanitary District boosted their pensions by cashing in unused sick leave, longevity pay, and even a “cafeteria plan” allowance despite appellate case law prohibiting such conversions. The former general manager of the district boosted his pension by more than $50,000, or 22 percent, by manipulating his final pay. As a result of cost of living adjustments, the general manager’s current pension is $275,240, more than he earned while employed at the district.²⁵

Given the wide variety of ways in which pension spiking occurs, determining the prevalence of pension spiking within your jurisdiction through public-records requests under state open records laws to is a good starting point. These may be submitted to state and local pension funds and government employers. Relevant information to request includes all statutes, ordinances, memoranda of understanding, policies, or practices that permit using certain components of compensation as pensionable pay. Employee pay records that provide an itemization of specific components of compensation are also helpful. These records should reveal, at least broadly, the pervasiveness and impact of pension spiking within your jurisdiction.

Depending on the constitutional and statutory schemes within a particular state, different strategies may be available to limit or end pension spiking.

Strategies to End Pension Spiking

A successful strategy to end pension spiking will be driven in large part by the statutory and constitutional protections available in your jurisdiction. In general, legal challenges to the practice will be in one of two forms: (1) statutory or enforcement actions, and (2) state gift clause constitutional challenges. Subsequent to or concurrent with these legal challenges, legislative remedies may also be pursued.

Statutory and Enforcement Challenges

Many states not only have statutes that permit pension spiking, but also have clear statutory provisions that prohibit certain components of compensation from being used to inflate an employee’s years of service or final average salary. In areas where the statutory provisions are not perfectly clear, state courts have on occasion prohibited certain types of spiking. In both of these circumstances, civil actions may be brought to challenge pension spiking practices at the state and local levels.

On August 15, 2013, the Goldwater Institute filed suit against the City of Phoenix and the senior police officer union seeking declaratory and injunctive relief to end pension spiking in Arizona’s largest city. The Institute later added the local pension board and the state pension board to the litigation.²⁶

The challenge in Phoenix was brought on purely statutory grounds. Because the State of Arizona administers the pension fund, the Public Safety Personnel Retirement System (“PSPRS”), Arizona law defines which components of compensation are and are not pensionable. State law prohibits public employees from using “unused sick leave, payment in lieu of vacation, payment for unused compensatory time or payment for any fringe benefits” to increase compensation for pension purposes.²⁷ Despite this, Phoenix entered into memorandums of understanding with several public unions that permitted employees to receive pensionable payments in lieu of accrued sick leave, vacation leave, compensatory time, and other fringe benefits, including payment for uniform allowances. Phoenix then incorporated these unlawful payments into their payroll practices. These added monthly payments were used to spike final average salary for pension calculations.

Given the statutory scheme in Arizona, the Goldwater Institute’s lawsuit, therefore, seeks to enforce the plain language of state statute. The goal of the litigation is to end pension spiking in Phoenix and prevent other municipalities in the state from circumventing state law by allowing city employees to add these unlawful components of compensation to their pension checks.

Similar actions may be brought in states where the law clearly prohibits specific types of pension spiking. Dozens of states prohibit use of vacation leave, sick leave, overtime, and other components of compensation to increase retirement benefits either expressly by statute or by judicial decision.²⁸

In addition to statutory challenges, enforcement actions may also be brought in states where courts have specifically prohibited certain types of pension spiking. Although prevailing case law may prevent pension spiking, municipalities and public unions may be unaware of the prevailing law, or attempt to circumvent it. Challengers, therefore, may have a cause of action to enforce existing court orders enjoining pension spiking or declaring the practice unlawful.

Gift Clause Challenge

State constitutional gift clause provisions prohibit public gifts or subsidies to private individuals or associations. Nearly all state constitutions have gift clauses, but some state courts have provided more robust protection against questionable public expenditures than others.²⁹

For example, some states require only a “public purpose” in order to survive a gift clause challenge. In these states, the government need only show that the government expenditure is designed to promote a public interest, even if it confers incidental private advantages. When courts have held that pension payments are part of overall compensation, rather than a gratuity, in the context of public pensions, the public purpose test may be easily satisfied.

Even still, potential challengers may tease out the purpose of providing the component of compensation from its use in increasing retirement benefits. For example, there may be valid public purposes for public expenditures on sick leave for employees, such as a healthy workforce. However, those purposes are not served when the expenditure is used to enhance retirement benefits. An employee who uses a sick leave day to maintain his current level of compensation is quite different from an employee who adds that sick leave day to his salary specifically to increase retirement benefits. While there may be a valid public purpose for the former use, the benefit of the latter use accrues only to a private individual.

In addition to a public purpose, gift clauses in many states also require adequate consideration. Generally, this means there must be some bargained-for exchange for the public expenditure. Moreover, “consideration is what one party to a contract obligates itself to do (or to forbear from doing) in return for the promise of the other contracting party.”³⁰

The consideration must be adequate. In Arizona’s seminal gift clause case, the Arizona Supreme Court held that any public payment which is “grossly disproportionate” to what is received in return violates the gift clause.³¹ For example, the government could not spend $5 million to repair a sewer line if other bidders were willing to do the job for $5,000.³² Such an expenditure would result in a subsidy to the contractor.

In the context of pension spiking, the public expenditure for the increased retirement benefits is grossly disproportionate to the value received. Returning to our sick leave example, assume one day of sick leave is worth $200. The government may spend $200 for a single day of sick leave, and receive proportionate value when an employee uses that day to maintain current compensation when ill and away from work. However, assume the same employee saved up and then cashed in that sick leave day to increase the employee’s final average salary. If the employee’s pension were based on just 50 percent of the employee’s salary then the government would spend that same $200 in just the first two years of the employee’s retirement. Since many public employees receive pensions for decades, a 40-year retirement, for example, would result in a public expenditure of $4,000 for the same sick leave day—20 times the value of that single workday! That public expenditure, by definition, is grossly disproportionate to what is received in return.

Since several states require the value received in return for the public expenditure to be roughly proportionate, successful gift clause challenges can be mounted based on the consideration prong.³³

Legislative Fixes

Many examples of pension spiking are truly outrageous, and can gain immediate media interest. For example, a recently retired city manager in Phoenix, David Cavazos, was able to artificially inflate his annual salary of $315,000 (which was itself raised by $80,000 less than two years before he retired) by at least $300,000. He did so by cashing in a lump-sum payment of $200,000 for unused sick leave he accrued before becoming city manager, $42,000 in unused vacation pay, a $21,600 vehicle allowance, as well as a $1,200 yearly cell phone allowance.³⁴ Similarly, Former Phoenix assistant fire chief Bobby Ruiz, cashed in $110,877 in sick leave, $14,528 of vacation time, and $43,152 in deferred compensation benefits to spike his pension.³⁵ In addition to the inherent unfairness of pension spiking in general, these real-world examples often result in public and editorial condemnation of the practice. Legal cases challenging pension spiking can highlight these abuses, and therefore, can also drive legislative change.

Legislative fixes can be accomplished at both the state and local levels. For state pension funds that include municipal employees, appeals can be made directly to the legislature. Statutes will often specifically define what counts as compensation and what does not. In Arizona, for example, vacation leave, sick leave, compensatory time, and other fringe benefits are excluded from the definition of compensation for all public safety workers in the state.³⁶ Overtime pay, however, is not excluded. Therefore, this statute can be easily amended to exclude overtime pay from the definition of compensation.³⁷

Similarly, city pension funds can be changed at the municipal level, either through city council action, or direct referendum of the voters.³⁸ It should be noted, however, that city councils may be beholden to the public unions that provide substantial support to get certain members elected. Additionally, at public hearings on pension reform, the loudest voices are often those of the union members themselves—regularly appearing at council meetings to lobby for more tax dollars while on taxpayer-funded release time.

Pension spiking abuses clearly undermine the public’s confidence that government compensation is fair and transparent. As a result, legal challenges aimed at ending the practice can also result in swift legislative change.

Conclusion

All public employees owe a fiduciary responsibility to the citizens they are supposed to serve. Unfortunately, when public employees are unionized, their representatives owe a duty to their members’ private interests, which creates an inherent tension with public employees’ fiduciary responsibilities.

The relationship between public employers and public unions is notoriously symbiotic. Union dues paid by public employees often finance state and local politicians who sign public contracts conferring lavish benefits on the very same unions that got them elected. Of the many abuses to emerge from this “collaborative enterprise,” taxpayer-funded release time and pension spiking are among the worst. Release time provides taxpayer dollars for purely private activities—in many cases taxpayer-funded lobbying activities aimed at seeking more taxpayer funds for government workers. Pension spiking costs taxpayers millions, strains already underfunded pension systems, creates inequities among pensioners, and leads many to conclude that compensation for public employees is inherently unfair. Fortunately, recent success in Arizona provides a roadmap to limit or end these abusive practices elsewhere . The efforts in Arizona may just be the beginning of a campaign to restore sanity and fiscal discipline in public agencies throughout the country.

References

State Appendix A

Full Pension Spiking Numbers

Read the Full PDF Report here

Numerous states are shaking off decades-old union shackles that have dampened job growth, weighed down economies, and created fiscal crises. The rust-belt states of Michigan and Indiana are the latest to convert to right-to-work states, putting them on a better footing for economic growth. While private sector unions are shrinking, public sector unions aren’t retreating quietly, however. Public employee unions play an outsized role in electing state and local officials with whom they then typically bargain behind closed doors over wages and benefits. These unions are leveraging that power to push back against right to work and implement policies known as release time and pension spiking.Monday, May 12, 2014 - 09:51Stopping Taxpayer Funded UnionsGoldwater's blueprint for ending release time and pension spikingTax Reform Government Spending State Powers City & Local Reform Government Accountability Report Policy ReportYes Pages from Pension Spiking Numbers.pdf Pages from Pension Spiking Numbers-2.pdf Pages from Pension Spiking Numbers-4.pdf Pages from Pension Spiking Numbers-5.pdf Pages from Pension Spiking Numbers-6.pdf Pages from Pension Spiking Numbers-31.pdf Pension Spiking Numbers.pdf References.pdf Appendix A - Gift Clause 50 state survey table 1 27 14 Adi.pdf Release Time.pdf 8 page Annual Report CondensedOnline.pdfBy Topicsfalse

Arizona Commerce Cronies: Picking and Choosing Winners With Your Tax Dollars

bwilson — Tue, 18 Mar 2014 18:24:07 +0000

Editor's Note: An earlier version of this report referred to Roy Vallee as Chairman and CEO of Avnet. In fact, Vallee resigned from his position at Avnet in 2011 and was replaced by Rick Hamada. The Goldwater Institute regrets the error.

After secretly agreeing to hand $10 million of public money to Apple Inc., the Arizona Commerce Authority (ACA) is coming under new scrutiny for sweetheart deals and bad investments.

Consider, for example, the security company owner who spent his $250,000 ACA grant on luxury cars and a plush Scottsdale office. Former AT Security Services owner, Jacques L. Davis, 27, was convicted in Maricopa County Superior Court last summer on one count of theft and one count of illegal control of an enterprise. He is serving his 2-1/2 year prison sentence in Douglas.

When the Arizona Department of Commerce became the ACA in 2011, supporters hoped its new “quasi-governmental” structure would free the agency to court major employers. The agency’s board of directors, chaired by Governor Jan Brewer and with members who are high-profile business executives, set the goal of bringing 75,000 jobs to the state in five years.

The state gives the agency $35 million a year and places an estimated $25 million of it in the “Arizona Competes Fund” (ACF). Referred to as the “deal-closing fund,” this pot of money is designated to subsidize companies’ expansion and, if possible, their relocation to the state. The remaining $10 million from this annual fund is then split, with $5 million to pay the salaries of the agency’s 68 staff members and the rest for other operational costs.

Even if the agency does not spend the full $35 million in a year, the fund is replenished each fiscal year with a fresh $31.5 million from state income tax collections and $3.5 million in lottery revenues.

The agency’s chief executive officer has the unilateral authority to determine which companies receive subsidies from the ACF. State law specifies that certain businesses are eligible for the fund’s subsidies.

However, financial records show the ACA awarded at least $1.5 million of its $10 million in grants from the ACF in three years to cities, towns, and nonprofit groups for projects with little statewide economic value.

For instance, the City of Flagstaff received a $100,000 grant that it gave to an ice cream cone-maker, Joy Cone Inc., to build a new batter room, shut down an incinerator, and hire five new employees over three years.

Read the Full PDF Version Here

The ACA also gave $340,000 from the ACF to a Casa Grande-based nonprofit group, Central Arizona Regional Economic Development Foundation. The organization had applied for $190,000 to give to a German company, Commonwealth Dairy, for a Greek yogurt plant that would employ 106 people in Casa Grande. The foundation said the remaining $150,000 in grant money was for the engineering firm, Phoenix Technology Works, which planned to hire five people.

Recently, the Commerce Authority tapped the ACF to build roads that most drivers around Arizona will never travel. The agency in December awarded the Town of Prescott Valley $500,000 to finish building “Enterprise Parkway” to link a business park to State Route 69. It also gave $369,156 to the City of Coolidge to complete the one-mile “Randolph Road,” which will connect an industrial zone to State Route 87.

Legislators, economic policy experts and watchdog organizations worry that, by design, the ACA lacks the checks and balances that could protect taxpayers from financial and political abuse. The statute regulating the ACF specifies that grants from the fund go to certain businesses or promote rural development. Since the ACA has never written any further rules to clarify eligibility criteria, the fund has been tapped for everything from a company’s expansion, to a city’s small road project, even though residents already pay other taxes that are dedicated to infrastructure.

Senate president Andy Biggs, R-Gilbert, who is an ex-officio non-voting member of the board, said he had opposed turning the Arizona Department of Commerce into a public-private agency because he worried that the new organization would lack accountability. Two years later, he said he still has misgivings.

“You’d have a big pot of money, and really nobody to oversee it,” Biggs said. “There’d really be nobody to question whether this was a good use of funds or not.”

Scot Mussi is executive director of the Arizona Free Enterprise Club, a nonprofit that is seeking new accountability measures for the ACA,

Arizona Free Enterprise Club Executive Director Scot Mussi

such as requiring disclosure of corporate tax credits.

“We’re talking about an entity that decides who can get special treatment, whether it’s from tax credits or whether it’s money from the deal-closing fund,” Mussi said. “And there’s no good evaluation on the results. There’s no real audit.”

A Goldwater Institute investigation found through interviews and documents that much of the agency’s secrecy and questionable spending are enabled by the laws that define and govern it. Among the findings:

• The ACA has not formalized any process or adopted consistent written rules or criteria for awarding grants from the ACF.

• State laws governing the commerce authority have shielded the board of directors from publicly discussing pending deals, economic opportunities, and potential conflicts of interest. These laws also exempt the board from disclosing records.

• The Commerce Authority’s chief executive officer can unilaterally award agency funds to businesses, without the board’s approval and without public input or disclosure.

• The board of directors’ ethics committee, which reviews conflicts of interest, has declined to call for the recusal of any board or staff member, although some have business, political and philanthropic interests that have benefited or could potentially benefit from the agency’s business dealings.

• ACA funds are vulnerable to political abuse. Last year, the legislature tacked onto the state budget bill a last-minute provision to loan $2 million to the Apache Railway line in Snowflake. Goldwater Institute attorneys have warned agency officials that the loan violates the state constitution, which bars special laws that provide government gifts, loans or subsidies to businesses.

The governor’s top aide did not return Goldwater Institute phone calls or e-mails about the ACA.

LESS TRANSPARENT

The quasi-governmental design of the ACA is a trend in state economic development. Like Arizona, about a dozen other states in recent years have restructured their states’ entrusted the private sector economic development agencies, or a portion of their agencies’ programs and initiatives. Connecticut, Florida, Indiana, Iowa, Michigan, Rhode Island, Texas, Utah, Virginia and Wyoming have turned their commerce departments or incentive programs into quasi-government agencies. North Carolina is considering a similar move.

The transformation was intended to give the economic development agencies an infusion of expertise and more flexibility to court business. Unfortunately, the ACA is costing the state five times more than its predecessor. The state appropriates $31.5 million annually to the ACA, compared to the estimated $6 million it appropriated to the Arizona Department of Commerce.

The blueprint for the quasi-governmental ACA was a 2010 report by the Governor’s Commerce Advisory Council. Council members included seven executives from some of Arizona’s largest companies and organizations, and then-director of the Arizona Department of Commerce, Donald Cardon.

Gov. Jan Brewer appointed sports mogul and real estate investor Jerry Colangelo as council chairman. Other members were Don Brandt, president and CEO of Arizona Public Service’s Pinnacle West Capital Corp.; Paul Bonavia, CEO and president of Tucson’s UniSource Energy Corp.; Bob Campbell, president of W.L. Gore and Associates; Brad Casper, CEO of Dial Corp./Henkel; Linda Hunt, head of CHW Arizona and St. Joseph’s Hospital and Medical Center; and Roy Vallee, former chairman and CEO of Avnet.

The council’s report highlighted states such as Florida, Texas, Utah and Virginia, whose economic development agencies work with nonprofit organizations that raise and spend private money to attract companies, jobs and investors to their states. The council made no mention of the reported and documented mismanagement at those model state agencies, but focused on their reported accomplishments. The council concluded that public-private partnerships were crucial for job growth.

“Activities aimed at economic development and marketing a state or region can be more successful if the public and private sector work together, rather than on their own,” the council wrote in the March 2010 report. “These organizations typically remove politics from day-to-day activities of the organizations and allow them to operate on a nonpartisan basis, with the long-term interests of the state as their top priority, versus short-term political agendas.”

The governor’s advisory council wrote that Arizona’s economic development agency should value principles of “transparency and accountability.” However, some of the accountability measures typically in place to safeguard government spending do not exist at the ACA.

Arizona’s quasi-governmental agency is less transparent than Texas’s, where their agency has fallen under national scrutiny as a “favors fund” for the governor’s office.

The Texas department must disclose all of the grants and incentives that it awards to companies, and the Texas Comptroller of Public Accounts or Texas State Auditor’s Office can audit its finances.

Texas allocates an estimated $500 million annually to subsidize economic development through three funds: the $240 million “Enterprise Fund,” a $140 million annual “Economic Development and Tourism Fund,” and a $114 million annual “Emerging Technology Fund.”

The ACF most closely mimics the Texas Emerging Technology Fund. Both states’ funds are overseen by a board of directors whose chair is the state governor.

The ACA has a much smaller budget for subsidies - $25 million a year in the ACF. It also has several legal exemptions that ensure board members and agency staff can maintain secrecy. By law, Arizona agency staff and board members do not have to disclose records or hold public discussions on issues that could potentially harm the competitiveness of the state or businesses, or that could expose trade secrets.

State laws also exempt the agency from following the uniform accounting standards required of other state departments. The ACA is allowed to hire a third-party contractor to conduct an annual audit while other agencies are reviewed by the Arizona Auditor General’s office.

Like Texas, Arizona also uses private nonprofit groups that collect and spend donations to support their states’ marketing efforts.

Researchers have found these nonprofit partnerships are a tool for politicians to circumvent state open meetings and records laws and interact privately with business representatives.

Vice Chair Jerry Colangelo

The nonprofit TexasOne collects millions of dollars in private donations to spend on Texas governor Rick Perry’s efforts to market Texas to out-of-state businesses. The New York Times and Bloomberg News found subsidies were awarded to many companies with ties to a key TexasOne donor, Ryan LLC. Several of those TexasOne donors also contributed to Perry’s political action committee.

The Arizona nonprofit group that supported the ACA, Team ACA, reportedly received donations from companies that also gave money to Governor Brewer’s political action committee and donated directly to the ACA. State officials and vice chair of the board, Jerry Colangelo, recently told the Arizona Republic they were shutting down the nonprofit, Team ACA, because donations can be made directly to the agency.

CHECKS AND BALANCES

Governor Brewer issued an executive order in 2010 to transform the Arizona Department of Commerce into a public-private agency. Citing recommendations from the Governor’s Commerce Advisory Council, she then set up a board of directors, declared herself the chairwoman, and appointed 17 other business leaders to the board, including advisory council members Colangelo, Bonavia and Vallee, to serve staggered terms.

Governor Janice K. Brewer

The board chose another advisory council member, then-department director Don Cardon, to lead the new agency. Cardon was paid a hefty $300,000 annual salary with a $50,000 signing bonus and a $12,000 car stipend – until he resigned in the middle of his three-year contract in 2012.

The governor negotiated a deal with legislators to fund and solidify the agency’s creation. She approved a $538 million tax cut package in exchange for a series of subsequent bills referred to as the state’s “Competitiveness Package.” This package included an annual funding allowance of $31.5 million from state income tax collections, and another $3.5 million from state lottery revenues, to pay for the agency’s economic development efforts and cover the cost of its operations.

Although the ACA has a large board of directors, “the board doesn’t make decisions on the actual incentive programs,” said Sandra Watson, a longtime Arizona Department of Commerce employee whom the board promoted to succeed Cardon as chief executive officer in 2012. “They don’t have a say on who gets what incentives.”

The chief executive officer, who does not have to hold public meetings to discuss or vote on which businesses the agency will aid, has unilateral authority to award subsidies.

The 17 voting members on the board of directors provide “private sector leadership in growing and diversifying the economy of this state,” according to its mission described in A.R.S. 41-1502.

The board also has a set of non-voting ex-officio members, which includes the Senate president, House speaker, presidents of the three state universities, the president of the Arizona Board of Regents, a president of a community college, chairman of the Arizona Aerospace and Defense Commission, chairman of the governor’s council on small business, the chairman of the governor’s council on workforce policy, a member of the Arizona rural business development advisory council, a representative for the Arizona League of Cities and Towns, and the president of the County Supervisors Association.

ACA is allowed to self-monitor to some degree. It can hire a third-party auditor to review the agency’s books and performance each year. The agency submits the report to the Arizona Auditor General’s office, which decides whether or not to accept the annual audit as is, or to conduct its own review.

Read Spotlight: Special Favors Make Special Loans

The office had been accepting the ACA’s third-party audits but plans to conduct its own review this year.

The agency’s board of directors has met in executive session at all nine of its meetings since August 2011, according to minutes and agendas on the azcommerce.com website. Board agendas often described the reasons for closed sessions as “client updates” and “business development strategies.”

The law A.R.S. 41-1502 gives the board far-reaching exemptions from Arizona’s public meetings laws when it or its committees, advisory councils and subcommittees discuss business opportunities that if made public could potentially harm businesses’ or the state’s competitive position.

Apple Inc. took an extraordinary step to ensure secrecy and required state and local officials to sign confidentiality agreements for the $10 million grant to move a subcontractor into the Mesa plant. Goldwater Institute attorneys found the agreements disconcerting.

“Arizona’s broad public records laws strongly favor the disclosure of all public information,” said Jon Riches, a Goldwater Institute attorney. “Confidentiality agreements, particularly when public dollars are promised, should be the very rare exception, not the rule.”

On top of the subsidies it controls, the ACA also has aided companies through the various tax credit programs that it oversees, including for film production, manufacturing, renewable energy, solar power, research and development, and computer data centers. Arizona’s tax laws offer companies another layer of secrecy and prohibit state officials from publicly identifying any taxpayer who has qualified for credits.

“We think it’s particularly important that an entity like the Commerce Authority has really strong safeguards in place because it’s essentially a private board of directors handing out public money to other private entities,” said Serena Unrein, who represents the consumer watchdog organization Arizona Public Interest Research Group.

Unrein said that although the agency’s grant contracts with companies each contain a set of objectives for job growth and capital investments, the agency does not have similar reporting standards for the various tax credit programs it oversees.

“We don’t know in a lot of cases what we’re getting for our investment,” Unrein said. “Right now, the checkpoints for these programs are all over the map.”

State auditors 10 years ago recommended that Arizona end confidentiality for corporations and suggested terminating many of the tax credit programs because research has produced little evidence that they drive economic growth.

Watson defended the ACA’s confidentiality as a necessary precaution to attract businesses to the state and for assisting existing businesses with expansion.

“Clients who are thinking about creating jobs, making a capital investment, making a business decision to either expand their operations or locate in the state – they may not have shared that (information) with their employees,” Watson said. “They may not have shared it with their shareholders yet. They may be a publicly-traded company and [disclosure] can have an implication on its stock prices.”

Major businesses are notorious for threatening to transfer locations when they attempt to net additional state subsidies and tax breaks. A researcher for the Washington, D.C.-based watchdog group that tracks economic development issues nationwide, Good Jobs First, said state officials should call their bluff.

“Ninety-eight plus percent of the cost factors for a company in making a site location have nothing to do with the taxes,” said Good Jobs First researcher Greg LeRoy. “It has to do with raw materials, the labor.”

LeRoy noted that Archer Daniels Midland’s threat last year to leave Illinois provoked a stand-off in the legislature over a multi-million dollar incentive package to assuage the company. The Illinois House rejected the deal in December. The company remains in Illinois.

CONFLICTS AND ETHICS

The high-profile leaders on the ACA’s board of directors have extensive interests outside of the board, which has heightened skepticism among legislators and policy analysts about whether board members themselves influence which companies receive incentives.

Many members have led multiple companies and are philanthropists, acting as donors and volunteer board members for area nonprofit and trade organizations. Some have contributed to each other’s personal or political causes.

State law requires ACA officials, staff and directors to declare any conflicts of interest and recuse themselves when they could benefit personally and financially from the agency’s activities.

Board members’ potential conflicts of interest are:

• Commerce Authority board member Drew Brown is chairman of the real estate and development firm DMB Associates, which developed Eastmark in Mesa where the Apple Inc. plant is located. Another of DMB’s limited-liability companies, DMB Mesa Proving Grounds, and Apple Inc.’s Arizona limited-liability firm, Platypus Development, signed real-estate development agreements in early November, weeks before the ACA announced its $10 million subsidy for Apple.

• ACA officials have been promoting the Interstate 11 freeway project to connect Las Vegas to Phoenix that would bisect more than 40,000 acres owned by the ACA board of directors’ vice chairman, Jerry Colangelo, and his fellow developers at JDM Partners. Their real estate group wants to build the “Douglas Ranch” and “Trillium” master-planned communities on the properties. An executive administrative assistant for JDM Partners, Jennifer Gray, declined requests for an interview on Colangelo’s behalf.

• Colangelo, a sports mogul and real estate developer who is the vice chairman for the ACA board, leads a nonprofit organization, Team ACA, which has collected and donated private funds to the ACA. Team ACA is even less transparent than the ACA in its financial disclosures.

• Team ACA vice chairman Ed Zito and the organization’s first president, former Commerce Authority CEO Don Cardon, told the ACA board of directors at an Oct. 19, 2012, meeting that they had planned to disclose donors in the nonprofit group’s annual Internal Revenue Service disclosure forms, according to an Arizona Capitol Times article. Cardon also then told the board that University of Phoenix’s parent company, Apollo Group, and Alliance Bank had donated more than $600,000 to the organization. However, contrary to Cardon’s promise to disclose donors, the nonprofit group’s first IRS filing, released in September 2013, didn’t identify donors. Team ACA also reported significantly lower revenues—$200,046—than Cardon had announced.

• Cardon received payments from the nonprofit group while acting as chief executive officer for the ACA. IRS filings for fiscal 2011 show Team ACA paid Cardon $30,000 in 2011. Cardon resigned as CEO a year later but remained president of Team ACA for nearly two more years. Last fall, Colangelo took over as president.Colangelo recently told the Arizona Republic that the nonprofit group would be dissolved.

Read Spotlight: Performance Standards

The ACA ethics committee has three board members whom the governor appoints to review conflict-of-interest disclosures. The committee determines whether a director has a conflict or needs to take additional steps, beyond disclosure or recusal, to prevent the conflict or an appearance of one.

The agency’s ethics policy doesn’t specify what those other measures could include, but they “shall be agreed upon and implemented by the ACA and the Stakeholder,” according to the policy.

The committee met three times from January 2012 to December 2013. It has

not found a single case in which it chose to take any special measures to address a board member’s declared conflict.

When asked why a committee is needed to review declarations of potential conflicts, board member Steve Macias said it ensures “that you have oversight to look at [a claim] and say, ‘Is it truly a conflict, or is there just a paperwork issue here?’”

DEAL-CLOSING FUND

From 2011 through September 2013, the ACA awarded nearly $10 million from the ACF to 35 companies, cities and organizations, according to transactions that the agency reported to the Arizona Open Books website.

Typically, a government agency releases formal rules that describe qualifications for receiving a grant. The ACA has not released any formal written policies or guidelines for the large deal-closing grants, which seven companies received from 2012 to September 2013, the agency’s annual report to the Joint Legislative Budget Committee shows. (This excludes the $10 million grant for Apple, awarded in November 2013.)

ACA spokeswoman Nicole McTheny said the law, A.R.S 41-1545.02, is the agency’s criteria. It allows the chief executive officer to award grants from the ACF to attract, expand or retain businesses.

To qualify for the ACF grants, a business must be in good legal standing in the state where the applicant was organized, owe no delinquent taxes, and qualify as an “Arizona basic industry.” State law defines a basic industry as a manufacturer or business that pays employees on average 100 percent of the county’s median wage, provides workers with health insurance and covers 65 percent of the premium or insurance membership. The business must also provide a third-party analysis that shows the estimated income, property, sales tax and government fee revenues for Arizona would outweigh the state’s incentives.

When McTheny was asked for documents indicating whose grant proposals had been rejected, she replied: “There are no rejection letters because there is no application.”

This means the seven largest grant recipients of ACA subsidies, which combined for $8.7 million in deal-closing awards, did not compete for funds through a formal application process.

COMPANY	JOBS CREATED IN 3 YRS	GRANT AMOUNT
Accelerate Diagnostics	65	$1,000,000
Clear Energy	225	$1,000,000
GoDaddy.com	300	$1,500,000
Maverick Healthcare Group	376	$1,000,000
Silicon Valley Bank	220	$3,000,000
Ulthera	111	$1,000,000
United HealthCare Services	400	$200,000
TOTAL	1697	$8,700,000

Source: ACA

The state set terms and conditions for payments in the companies’ grant agreements.

The law also allows the chief executive officer to award ACF subsidies for programs and projects for “rural businesses, small businesses and business development that enhance economic development.” The ACA has operated its $2 million annual “Rural Economic Development Grant” program with this section of law in mind, McTheny said.

Mussi of the Arizona Free Enterprise Club said he believes the state made a mistake when it gave full spending authority to the ACA’s chief executive officer.

“It is not in the best interest of the taxpayers to have one person making those decisions,” Mussi said.

From 2012 to September 2013, the state agency gave more than $1.5 million of the $10 million in ACF grants to cities, towns and a nonprofit group, despite the legal specification that the incentives are for businesses.

The City of Flagstaff’s $100,000 grant for its local ice cream cone-maker, and Casa Grande’s grants for dairy and Greek yogurt manufacturing were among the rural grants awarded in 2012.

The ACA has not posted on the azcommerce.com website or published with the Arizona Secretary of State any formal agency rule that specifies criteria that businesses must fulfill to qualify for the rural development grants.

‘KINGMAKER’

Good Jobs First researcher LeRoy said the creation of the ACA is part of a national trend that he refers to as a “politicization of state economic development programs,” which he believes should end.

The watchdog group has determined the partnerships actually create another layer of bureaucracy that “is antithetical to accountability,” researchers wrote in their October report. They urged states to avoid the public-private structure.

“No matter who’s on the [agency] board, if the governor’s appointing them, they’re going to be on a very short gubernatorial leash,” LeRoy said in an interview. “[Public-private partnerships] are blueprints for mischief, and that’s being kind.”

Currently, the ACA leadership chooses which businesses to assist and which to ignore, with few checks and balances. A government agency should help businesses navigate local and regional laws and requirements, but it should not be in charge of determining which businesses can receive state funds and which can’t, according to Steve Slivinski, senior economist at the Goldwater Institute.

“The economic development office should serve the role of an ombudsman for businesses, including home-grown businesses, small or large, that want to remain in Arizona but need an advocate to help navigate bureaucracy, such as draconian building codes and excessively risk-averse land-use regulations,” Slivinski said. “The economic development office should not try to serve the role as economic ‘kingmaker’ the way the current office—or other offices in other states—try to do today.”

Read the Full PDF Version Here

Read Spotlight: Special Favors Make Special Loans

Read Spotlight: Performance Standards

Most government departments and agencies have a governing board, council or commission that discusses and makes major spending decisions in public meetings. However, the state laws that govern the ACA allow the board of directors, its committees, subcommittees and advisory councils to discuss business opportunities in executive session. The chief executive officer, who does not have to hold public meetings to discuss or vote on which businesses the agency will aid, has unilateral authority to award subsidies.Thursday, March 20, 2014 - 09:44Arizona Commerce CroniesRolling the dice with tax dollarsCity & Local Reform Business & Job Creation Workplace Freedom Report Investigative ReportYes ACA.pdf Apache Railroad.pdf Performance Measues.pdfBy TopicsEmily Gersemafalse

Everyone Deserves the Right to Try: Empowering the Terminally Ill to Take Control of their Treatment

bwilson — Fri, 21 Mar 2014 16:50:48 +0000

In 2002, Kianna Karnes, a 41-year-old mother of four children, was diagnosed with kidney cancer.¹She was treated with interleukin-2, the only medication approved by the Food and Drug Administration (FDA) at the time to treat her disease. When that treatment failed, her father began researching investigational medications, learning in 2004 that both Pfizer and Bayer were conducting clinical trials for new investigational medications to treat kidney cancer. Karnes was ineligible for the clinical trial because her cancer had previously spread to her brain. Although her brain tumors had been removed, she was still disqualified from joining the clinical trial, so her father sought expanded access for his daughter. Months passed before he was able to secure access for his daughter. He contacted Congressman Dan Burton’s (R-IN) office for assistance, and drew media coverage of Karnes’ struggle in the Wall Street Journal. On March 24, 2005, the FDA notified the family that it had approved a single-patient IND for Karnes. Tragically, it was too late—Kianna Karnes died the same day access was approved.² Less than a year later, both drugs were given final FDA approval to treat advanced kidney cancer. Speaking after his daughter’s death, her father said, “I don’t know that either of these drugs would have saved Kianna’s life, but wouldn’t it be nice to give her a chance?”³

>>Read the Proposed Legislation Here<<

In the case of Kianna Karnes, she had a better chance than most patients at receiving expanded access. As her father explained, “Here is a case where her old man understood clinical trials. I knew about compassionate use; I had a friendship with a powerful member of Congress; I’ve got the Wall Street Journal behind me. But I still couldn’t save her life. Now, what about the thousands of people out there who don’t have these kinds of resources available to them?”⁴ To most patients, and many physicians outside of major institutions, the process of obtaining expanded access is excessively time-consuming and extremely difficult to navigate.

For patients suffering from terminal illnesses, the FDA is the arbiter of life and death. These patients, suffering from diseases ranging from ALS to Zellweger Syndrome, face little chance of recovery. For patients like Kianna, investigational medicines provide a glimmer of hope. The FDA, however, often stands between the patients and the treatments that may alleviate their symptoms or provide a cure. To access these treatments, patients must either go through a lengthy FDA exemption process or wait for the treatments to receive FDA approval, which can take a decade or more and cost hundreds of millions of dollars. Sadly, over half a million cancer patients and thousands of patients with other terminal illnesses die each year as the bureaucratic wheels at the FDA slowly turn.⁵

Patients should be free to exercise a basic freedom – attempting to preserve one’s own life. The burdens imposed on a terminal patient who fights to save his or her own life are a violation of personal liberty. Such people should have the option of accessing investigational drugs which have passed basic safety tests, provided there is a doctor’s recommendation, informed consent, and the willingness of the manufacturer of the medication to make such drugs available.

States should enact “Right to Try” measures to protect the fundamental right of people to try to save their own lives. Designed by the Goldwater Institute, this initiative would allow terminal patients access to investigational drugs that have completed basic safety testing, thereby dramatically reducing paperwork, wait times and bureaucracy, and, most importantly, potentially saving lives.

Introduction

Anna was only 13 years old when she died of an embryonal sarcoma, a rare form of liver cancer.⁶ Six months before she died, she had exhausted all conventional therapies, and her doctors informed the family there was nothing more they could do. Her parents were not willing to accept the news without a fight. They began researching experimental medications and soon discovered a number of investigational drugs in clinical testing to treat sarcomas like Anna’s. Anna’s age and advanced diagnosis, however, disqualified her from participating in the clinical trials, leaving the Tomalis family with one only option – asking the FDA for permission for Anna to try investigational drugs through an expanded access program – the single patient IND.

For months, the family sought approval for expanded access for their daughter. However, the process was difficult, uncertain, and time consuming. Anna’s mother said, “I came into this process so naïve, thinking that those of us who seek compassionate use of drugs actually get them. It was a shock to find out I had been seriously misled.”⁷ By the time the FDA finally granted access, it was too late. Anna died three weeks later, leaving her grieving family wondering whether Anna could have won her battle if she had been granted access sooner.

The FDA strictly controls which medications are available in the United States. Before a drug can be made available to the general public, it must undergo a lengthy and expensive clinical trial process to determine its safety and efficacy, which takes on average 10 to 15 years and over $800 million dollars to complete.⁸ Terminally ill patients can request exemptions, but the exemption process can take several months and requires doctors to complete paperwork that the FDA itself notes will require more than 100 hours to complete.⁹Ultimately, the decision still rests with the FDA.

These bureaucratic impediments violate an individual’s fundamental right to try to save his own life. Unfortunately, the federal government has shown little interest in reforming the FDA as bills to reform the process for terminal patients have been introduced, but have never received a vote in Congress. State legislators, however, have the opportunity to protect their citizens’ right to try investigational medications by enacting Right to Try measures. These measures would ensure the right to protect one’s life by returning medical decisions where they belong – to patients and doctors.

History of FDA Regulations of Medications

Today, the FDA possesses wide regulatory authority to control which drugs may be sold within the United States. This regulatory authority was not granted in one fell swoop, but was the result of over a half century of legislation. During the twentieth century, the FDA evolved from a minor bureau with only 28 food and drug inspectors into a mammoth agency with a budget of nearly $4 billion.¹⁰

The Pure Food and Drug Act, passed in 1906, marked the beginning of federal regulation of drugs.¹¹ The regulation prohibited the manufacture or sale of adulterated or misbranded foods and drugs which were produced in federal territory or transported across state lines.¹² Enforcement of the act was given to the Bureau of Chemistry which was later renamed the FDA in 1927.¹³

Although there had been some earlier calls to require pre-market safety testing, it was due in large measure to the public outcry over the Elixir Sulfanilamide incident that Congress passed the Food, Drug, and Cosmetic Act of 1938 (FDCA). The previous year, Elixir Sulfanilamide, a drug which had been used for years in tablet and powder form to treat streptococcal infections, was converted to a liquid form.¹⁴ The new liquid version of Elixir Sulfanilamide used diethylene glycol as a solvent, a poisonous compound.¹⁵ Tragically, the company was unaware of the solvent’s deadly effects.¹⁶ Within days of the first shipments, the drug began to claim lives across the country. Before the drug could be recalled by the manufacturer, more than 100 people had died.¹⁷ Congress responded by passing the FDCA, which for the first time granted the FDA the authority to require pre-market safety testing of all new drugs.¹⁸

After the enactment of the FDCA, the FDA began to require pre-market testing for drug safety, however pre-market testing for efficacy was not required until the 1960’s with the passage of the Kefauver-Harris Amendments.¹⁹ The Kefauver-Harris Amendments were enacted as a direct result of worldwide Thalidomide-caused birth defects. Although Thalidomide was sold in 46 countries, it was never approved for sale in the United States due to the FDA’s lingering safety concerns.²⁰ While over 10,000 children worldwide were born with birth defects attributed to Thalidomide, only 17 of those children were born in the United States, where access to the drug was limited to those patients undergoing the FDA safety trial.²¹The Kefauver-Harris Amendments drastically expanded the FDA’s regulatory authority by requiring drug manufacturers to prove efficacy prior to being approved for sale.²²

This vast new granting of power was unwarranted. Thalidomide presented a safety problem (over which the FDA already had authority) – not an efficacy problem. As a result of the Kefauver-Harris Amendments, no drug could be sold within the United States until it had been deemed both safe and effective by the FDA.²³

In response, the FDA designed a clinical trial process which is substantially the same practice still in place today. During the ensuing 50 years, everything in the medical world — from the way diseases are diagnosed and treated to the way medical records are kept — has been modernized, but the FDA continues to adhere to an approval process that is half a century old.

Unfortunately, by clinging to this dated process, the FDA creates substantial barriers which inhibit a company’s ability to bring new drugs to market in a timely fashion, even when those drugs have the potential to save lives.

Approving New Medications

New drugs are vitally important to improving the lives and health of Americans. Between 1986 and 2000, new drugs were responsible for 40 percent of the total increase in life expectancy.²⁴ Yet, the FDA’s clinical trial process remains lengthy and expensive. It takes, on average, more than a decade and $800 million dollars (though the cost often can exceed a billion dollars) to bring a new drug from the laboratory to the market.²⁵ Polls show a clear majority of specialists believe the FDA clinical trial process is too slow and most report having been personally hindered in treating a patient due to the FDA approval process.²⁶

The clinical trial process begins when a drug developer submits an Investigational New Drug Application (IND) to the FDA.²⁷ The IND application includes all available data on the proposed investigational drug, including the results of any animal testing. In reviewing IND applications, the FDA seeks to ensure that the proposed trial does not expose patients to “unreasonable risk of harm.”²⁸ Clinical trials then move ahead in three mandatory human testing phases.²⁹ Phase I involves administering the investigational drug to a small group of 20 to 80 volunteers to test for toxicity and immediately observable side effects.³⁰ The major emphasis of Phase I testing is safety. Over 60 percent of investigational drugs in Phase I testing are deemed safe enough to move on to Phase II.³¹

While safety continues to be evaluated, the main focus of Phase II is the drug’s effectiveness in treating the targeted disease or condition.³² Approximately one-third of the drugs in Phase II trials show enough evidence of efficacy to move on to Phase III.³³

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During Phase III, a much larger group of individuals receive the drug as the sponsor gathers additional evidence of efficacy by studying the drug’s effects in diverse populations, different dosages, and in combination with other medications. One rationale for Phase III is that as more patients are treated with the investigational drug, less common side effects are more likely to be discovered.³⁴ During Phase III, the drug is administered to hundreds or even thousands of individuals.

Upon completion of Phase III, a drug sponsor may submit a New Drug Application (NDA) to the FDA’s Center for Drug Evaluation and Research (CDER) for review.³⁵ The FDA then has 60 days to consider the NDA to determine if the application should move forward and filed for FDA review. The final review process can then take up to a year.³⁶ To obtain final approval, the FDA requires that data amassed from the clinical trials indicate “substantial evidence” of both safety and effectiveness.³⁷ According to the former head of the CDER, Janet Woodcock, the FDA approves approximately 75 percent of all filed NDAs.³⁸

Clinical trials offer a way for patients to access investigational medications, but many of the sickest individuals are barred from participation. An estimated 97 percent of the sickest patients are ineligible for or otherwise lack access to clinical trials.³⁹ Outside of participating in a clinical trial, patients have few options to access promising drugs.

The Era of Patient Activism and Demands for Change

Prior to the emergence of AIDS in the 1980’s, access to investigational drugs was limited almost exclusively to patients admitted into clinical trials.⁴⁰ With the outbreak of AIDS, the FDA faced a group of patients who lacked any available treatment options.

AIDS was first identified by the Center for Disease Control in 1981 and spread rapidly among certain population groups.⁴¹ With an average of 10 years to bring a drug to market and no known treatments available, an AIDS diagnosis in the early 1980’s was akin to a death sentence.⁴² By April 1986, only 200 to 300 AIDS patients out of tens of thousands had been allowed to participate in clinical trials.⁴³ An FDA official asserted that embarking on a wider scale clinical trial to provide expanded access would be “wasteful of resources.”⁴⁴ Despite calls from AIDS patients desperate for any chance, the FDA clung to its assertion that it was simply protecting patients from potentially ineffective drugs. For these patients, confronted with a terminal diagnosis, questions of efficacy and side effects were irrelevant. One patient explained, “I know what the side effects of untreated AIDS are. Based on past experience, there’s a 75 percent chance I’ll be dead in two years.”⁴⁵ These patients, who faced imminent death, began to demand access to drugs for which efficacy was unknown. This was the beginning of the movement for the recognition of terminal-patient rights.

FDA Expanded Access Programs

In response to AIDS patients’ demands for access to investigational drugs, the FDA began its first formal expanded access programs to allow limited access to patients outside the clinical-trial setting. While these new expanded access programs were a step forward for terminal patients, they proved largely ineffective at solving the problem of access. The promulgation of the 1987 expanded access regulations marked the first time the FDA had formalized an expanded access program to allow patients, under very limited circumstances, to access investigational drugs prior to final FDA approval. Expanded Access Programs (EAPs), including treatment INDs and later individual INDs, are often referred to colloquially as “compassionate use” programs.

The first formal expanded access program was the treatment investigational new drug (treatment IND) application process, which began in 1987.⁴⁶ Under this program, a company sponsoring a clinical trial may submit a treatment IND application requesting FDA permission to allow specific groups of terminal patients to use the drug prior to FDA approval outside of the clinical trial.⁴⁷ Treatment INDs are generally limited to investigational drugs that are in Phase III of clinical trials or have completed Phase III and are awaiting NDA approval. Although regulations permit granting a treatment IND during Phase II, such instances are rare.⁴⁸ As the FDA describes it, for the agency to consider a treatment IND, the clinical trials must be “well underway, if not almost finished.”⁴⁹ The FDA may approve the application if the clinical trials show promising evidence of the drug’s efficacy. If the treatment IND is approved, the sponsor of the investigational drug may begin providing access to a predefined patient group outside the ongoing trial setting.

While AIDS activist Martin Delaney called the new policy a “giant step for the sick and dying,” treatment INDs did not prove to be the boon that many patients hoped.⁵⁰ Following the expanded access program, access to investigational drugs did not expand in a significant measure. By March 1990, the FDA had approved 18 treatment INDs for various conditions, which gave almost 20,000 patients who were otherwise ineligible for clinical trials access to investigational drugs.⁵¹ With tens of thousands of AIDS patients and over one and a half million cancer diagnoses each year, 20,000 was a minor improvement.⁵² In fact, from 1987 until 2002, the FDA approved only 44 treatment IND applications for conditions ranging from AIDS to chronic pain – an average of less than three per year.⁵³

In 1997, 10 years after the first expanded access program, the FDA approved the individual, also called single-patient IND. Unlike treatment INDs, which grant access to a wider group of patients, the single-patient IND is designed to allow an individual patient who is otherwise ineligible for a clinical trial to obtain access to an investigational drug. An application for a single-patient IND may be submitted by either the patient’s doctor or the sponsor of the investigational drug.

Although the FDA had occasionally permitted individual patients to use investigational drugs outside of clinical trials, there were no formal rules governing how such grants were authorized prior to 1997. Because of concerns that the informal process was arbitrary and inconsistent, the issue was addressed as part of the Food and Drug Administration Modernization Act (FDAMA) of 1997. FDAMA specifies that single-patient INDs are permissible only when all of the following conditions are met:

1.) The patient’s physician determines the patient has no comparable or satisfactory alternative therapy;

2.) the FDA determines there is sufficient evidence of safety and effectiveness to support the use of the investigational drug;

3.) the FDA determines that provision of the investigational drug will not interfere with the initiation, conduct, or completion of clinical investigations to support marketing approval; and

4.) the sponsor or clinical investigator submits information sufficient to satisfy the IND requirements.

Submission of an application for a single-patient IND is only permissible when the sponsor of the investigational drug has expressed willingness to supply the drug to the patient. If the sponsor is willing to provide access, the treating physician or the drug’s sponsor submits an IND application, an outline of the patient’s medical history, a proposed treatment plan, and a commitment to obtain informed consent from the patient and Institutional Review Board (IRB) approval.⁵⁴

Although the FDA claims the paperwork burden placed on doctors who wish to apply for a single-patient IND on behalf of a patient is “non-labor intensive, straightforward, and appropriate,” the burden is actually quite extensive.⁵⁵ The application itself reads, “the burden of time for this collection of information is estimated to average 100 hours per response, including the time to review instructions, search existing data sources, gather and maintain the data needed and complete and review the collection of information.”⁵⁶ In rare situations, the request may be made over the phone, but the complex paperwork must still be completed soon after the initial verbal request.⁵⁷ Although the FDA may believe the filing of an IND to be a small burden on physicians, members of the medical profession feel different. As Dr. Judy Stone, a physician with an independent practice explained, “Except perhaps for academic settings with an extensive infrastructure, INDs are incredibly burdensome, time-consuming, and expensive for an independent practitioner to obtain. They involve hours of paperwork. My office practice consisted of me and 1-1.5 secretaries. Who has time?”⁵⁸

Once a single-patient IND application has been submitted, the FDA has 30 days to review the application.⁵⁹ During this time, the FDA assesses risks and benefits posed to the patient (an analysis already performed by the treating physician), including whether there is enough evidence of the drug’s efficacy, and whether allowing access by a patient outside the clinical-trial setting would harm the on-going clinical trial. Although the FDA grants most single-patient INDs, the FDA retains the power to refuse an application in spite of the treating physician’s belief that the investigational drug represents the patient’s last hope.⁶⁰

Burdens of the FDA’s Expanded Access Programs

“The decision for terminally ill patients to take an investigational drug should be between the physician and the patient, not government bureaucrats.” ~ Senator Sam Brownback (R-KS)

While the FDA is tasked with protecting the public from unsafe and ineffective medications, the agency’s approach is inappropriate in the context of terminally ill patients. The terminally ill face a much different risk-benefit analysis than the public at large. Patients who are not battling an immediately life-threatening illness are likely less risk-tolerant and more willing to wait for a proven cure, but terminal patients do not have the luxury of time. Many terminal patients who lack other treatment options may be willing, even eager, to try medications whose efficacy has not yet been established. Even the FDA has recognized that “for a person with a serious or life-threatening disease, who lacks a satisfactory therapy, a promising, but not yet fully evaluated product may represent the best available choice.”⁶¹

Despite this promising observation by the FDA, as of August 18, 2013, there were over 60,000 ongoing clinical trials, but only 210 ongoing expanded access trials.⁶² This number includes both treatment INDs and single-patient INDs. Reports from previous years show a similarly small number of patients gaining expanded access. In 2011, just shy of 1,200 patients received expanded access through either a single-patient or treatment IND.⁶³ While the total had slightly increased from 1,014 patients in 2010, this is a very small number considering that, in that same year, there were 1,529,560 new cancer cases.⁶⁴ In 2012, the number of patients granted expanded access dropped down to a mere 940.⁶⁵ The onerous process the FDA requires a patient to go through to request expanded access contributes to the number being so low.

Despite the real possibility of death that is ever-present for terminal patients, the FDA persists in burdening a person’s right to try to save his own life by preventing access to investigational medications in three distinct ways. First, by requiring physicians to complete an IND for each request for single-patient expanded access, the FDA discourages doctors from even attempting to obtain access for their patients. Second, the FDA has unfettered authority to deny a terminal patient access to potentially life-saving medications for a variety of reasons, including nonmedical reasons. Third, the FDA’s requirement that all applications approved by the agency must then receive approval from an institutional review board further delays and inhibits access for patients in smaller and rural treatment centers. Together, these burdens create significant delays that can further endanger a person’s life.

The Burden of the IND Application

The requirement that physicians complete an IND for each request for single-patient expanded access is a significant hurdle standing between terminally ill patients and potentially life-saving medications. While some amount of paperwork may be reasonable, this form is so needlessly lengthy and complex that few doctors are willing or able to complete it.

Forty percent of cancer patients attempt to enroll in clinical trials.⁶⁶ Many of these patients are turned away because they do not meet the stringent eligibility requirements or because they do not live near or have the ability to travel to a medical facility where the trial is being conducted.⁶⁷With more than a half-million deaths due to cancer every year in the United States and such a high level of interest from cancer patients in obtaining investigational medications, one would assume there would be a significant number of applications for expanded access to these medications every year. Yet, the average number of single-patient IND applications granted access to investigational medications for the last three years has been only 544. The burdensome IND application required by the FDA explains why the number is so low.

SOURCE: A National Survey of Orthopedic Surgeons Regarding the Food and Drug Administration and the Availability of New Therapies

The FDA is aware of the fact that the IND application requirement creates a serious impediment that discourages doctors from applying for single-patient expanded access. This is illustrated in the recent FDA attempt to require an IND application for fecal transplants.⁶⁸

Such transplants are used to treat patients suffering from recurrent clostridium difficile infections. According to the Center for Disease Control, approximately 14,000 Americans die each year from clostridium difficile, but fecal transplants promise to greatly reduce that number.⁶⁹ A recent study by the New England Journal of Medicine revealed that 81 percent of patients with a clostridium difficile infection were cured after the first transplant, and that number increases to 94 percent after a second transplant from a new donor.⁷⁰ Despite the fact that clinicians have been providing this treatment with a very high success rate, the FDA announced in the spring of 2013 that henceforth physicians would need to seek an IND for each treatment.⁷¹ The outcry from physicians against this new requirement was swift.

Requiring an IND places a huge burden on doctors in terms of both time and cost – a burden that will result in fewer doctors who are willing to perform the procedure. As one gastroenterologist noted, “I’m already seeing that because of this requirement, a lot of doctors that were doing fecal transplants have either shut down or put their patients on hold.”⁷² Dr. Trevor Van Schooneveld of the University of Nebraska Medical Center had performed 20 fecal transplants since 2011, but after the FDA instituted the IND requirement, he had to delay treatment for three patients while he prepared and submitted an IND for each patient.⁷³ Of course, not all doctors are able to put in the extensive time necessary to complete an IND, leading many to opt out of offering the procedure altogether.

Completion of an IND is complicated and time-consuming. When she was informed that the FDA would be requiring an IND for each transplant, Dr. Colleen Kelly, who had previous experience in completing INDs, began the process of filing an IND for the procedure. “I literally cleared my schedule in the office for two weeks of 12-hour days. The IND process is not ideal. There’s no ‘IND for Dummies.’ When you’re a doctor who wants to do this, it’s not a real straightforward process.”⁷⁴ Furthermore, physicians are prohibited from submitting an individual patient access protocol to an existing IND for which the physician is not a sponsor, which means that a physician unfamiliar with the IND procedure cannot avail himself of a successful IND submitted by another physician.⁷⁵ Dr. Kelly was not the only physician to take note of the IND burden. Another doctor complained of the increased cost, stating, “Just putting [an IND] together and carrying it out and managing data to the level of sophistication required by the FDA, just running it all costs a lot of money.”⁷⁶ Patients have expressed their concerns as well. Barat McClain, whose clostridium difficile had been treated and cured with a transplant, said, “I fear many doctors will say, ‘It’s just a procedure I can’t afford to do. Time is money, and I can’t afford to spend my precious time filling out the damn forms.’”⁷⁷

After receiving warnings from patients, physicians, and organizations such as the American Gastroenterological Association cautioning that requiring physicians to complete an IND for each transplant would result in the virtual elimination of this life-saving procedure, the FDA abruptly reversed course.⁷⁸On July 18, 2013, the agency released guidance for the transplants. The guidance was issued without prior public participation because such public participation was “not feasible or appropriate” as the subject dealt with “an urgent issue affecting patients with life-threatening infections.”⁷⁹In response to provider warnings that requiring an IND would essentially make fecal transplants largely unavailable, the FDA decided not to require an IND for each procedure provided there was adequate informed consent by the patient. The objective of the guidance was to “ensure widespread availability of FMT [fecal microbiota transplants].”⁸⁰ In doing so, the FDA openly conceded that requiring individual INDs seriously inhibits, if not eviscerates, access to life-saving medical procedures.

FDA officials have stated that the agency wants patients with life-threatening diseases to have “early access to promising medical interventions.”⁸¹ Despite that oft-repeated statement, the FDA requires the completion of an IND that the agency has admitted makes certain procedures largely unavailable, especially since many doctors lack the time or expertise to deal with the burdensome application. In a recent survey, 60 percent of orthopedic surgeons said that the FDA hindered their ability to use “promising new drugs and medical devices.”⁸² In fact, studies show that among the reasons many doctors do not participate in clinical trials is the overly rigid protocols, concern about uncompensated staff time, lack of resources, and the burden of data management.⁸³ Many of these concerns would be mitigated by eliminating the IND requirement.

The FDA’s Expansive Veto Power

Next, the FDA burdens the rights of terminal patients by claiming the authority to override both the will of the patient and the recommendation of a doctor by bureaucratic veto. The law allows the FDA to deny an individual request for expanded access if the agency believes there is insufficient evidence of either safety or efficacy, or if the agency determines that allowing access will interfere with clinical investigations.⁸⁴While on the surface this appears to be the worst of the three burdens, in reality, by making the IND so complicated and time consuming, most requests never even make it to this stage. Even so, it is troubling that when a doctor has taken the time to complete an IND and the company sponsoring the clinical trial has agreed to provide the patient access to the investigational drug, the FDA still has the power to deny the will of the patient, the advice of the doctor, and the charity of the sponsor. The FDA has acknowledged that people might question why, if a doctor already determined an investigational

drug represents the last and best hope for a terminal patient and the patient is willing to assume the risk, the FDA should have veto power.

Michael Friedman, the Lead Deputy Commissioner of the FDA, addressed this very question during congressional testimony, stating, “In a typical single-patient IND situation, especially those involving emergency IND requests, the patient’s physician may have only limited information about the investigational therapy being requested.”⁸⁵

It is certainly true that information available during a clinical trial is limited, but the information is equally limited to patients enrolled in the ongoing clinical trial of the same investigational drug. For patients in the clinical trial process, the FDA deals with the lack of information not by banning access but by requiring informed consent to ensure that participants are aware of the possibility the drug could cause unknown side effects. Terminal patients should be afforded that same opportunity. As one father who fought to gain expanded access for his daughter explained, “If the only alternative is death, then for God’s sake, let ‘em have the drug.”⁸⁶

According to FDA officials, “the Agency’s primary role in deciding whether to allow a single-patient IND to proceed is to determine whether use of the therapy in the particular patient involved is reasonable.”⁸⁷Although the FDA believes each request should be evaluated individually, the agency maintains there could be times when two people with the same life-threatening illness may receive different responses to IND applications, just as there may be circumstances which “make the risks acceptable for one patient, but not for another.”⁸⁸The reasonableness of a course of treatment, however, is not an objective fact that can be ascertained by a bureaucrat reviewing records – it is a deeply personal decision that should be made by the patient in consultation with his or her doctor and should not be second-guessed by government officials.

The FDA disagrees. As Patty Delaney, the former director of the FDA’s cancer liaison program explained in 2007, “the patient has a right to be heard, but in the end, it’s the data that matters. FDA opinions about safety and efficacy are always based on data.”⁸⁹ If a trained medical doctor believes that, given the patient’s diagnosis and medical history, the patient’s best and perhaps only chance at life is to try an investigational medication and the sponsoring drug company is willing to supply the medication, the FDA should not have authority to overrule both the advice of the doctor and the wishes of the patient.

By the beginning of Phase II of a clinical trial, the FDA has already seen enough evidence of a drug’s safety to allow it to be tested on an expanded group of subjects. While the FDA talks at length about the potential risks expanded access patients would be exposed to, the risk to an individual patient outside the clinical trial is no greater than the risk the FDA is permitting patients inside the trial to take. No one expects investigational medications to be a panacea that will cure all those who use them, and indeed it is impossible to say how many will be helped by these medications. What can be said is the number who will be helped is unquestionably greater than zero. Patients and their families understand this, and most are realistic in their expectations. They are simply looking for a chance. As Jonathan Agin, a father of a young girl who was unable to obtain expanded access, explained in the Huffington Post, “We will never know whether the drugs we were not afforded access to could have helped Alexis. This is a heavy burden to shoulder in two simple words, ‘what if.’”⁹⁰ That is a burden no parent should have to bear, yet it is a burden the FDA imposes.

If there is a chance for improvement and the patient is willing to accept the risk, which is no greater than the risk posed to any other patient enrolled in the ongoing clinical trial, government should not stand in the way. No government agency should have the authority to deny a terminal patient access to potentially life-saving medications, especially those already deemed safe enough for expanded human trials.

Perhaps the most troubling argument in favor of the FDA’s veto power is that the agency is always mindful of the effect expanded access may have on the clinical-trial process.⁹¹ As one FDA official put it, “An individual with a life-threatening and chronic illness for which there is no adequate remedy has a compelling case. As compelling as an individual case is, however, the cost of providing individual access cannot be to sacrifice the system that ultimately establishes whether therapies are safe and effective.”⁹² Mr. Friedman was referring to nonmedical reasons why the FDA may deny an IND application. In discussing why the agency might deny IND requests, the FDA recently noted that the “FDA could also have become aware, since authorizing previous requests for access, that access is impeding the clinical development of the drug and, on that ground, deny further requests for access.”⁹³ The practical result is that a person who does not qualify for the clinical trial of an investigational drug could be denied access simply because there are not enough participants enrolled in the trial.

The FDA is concerned that allowing wider access to investigational medications outside the clinical trial setting will create a lack of test subjects who are willing to join a clinical trial, because in clinical trials some patients receive placebos or already approved medications instead of the investigational drug.⁹⁴ The agency argues that freer access to such medications would discourage enrollment in the double blind clinical trials and ultimately harm scientific understanding of the medications. Therefore, the FDA puts protection of the clinical-trial process above the lives of terminally ill patients.

Beyond the lack of humanity inherent in this policy, there are additional flaws to the FDA’s position. Experimental medications designed to treat terminal illnesses are only a subset of the drugs undergoing clinical trials.The FDA’s position makes the assumption that the current clinical trial process, complete with the double blind studies, is the only sound way to test new medications. However, many scholars and even the former Director of the FDA, Andrew von Eschenbach, have urged alternatives to the current clinical trial process. ⁹⁷ Nevertheless, the agency continues to place its outdated processes above all other concerns.

The Inequity of IRB Review Requirement

An additional way in which the FDA burdens the rights of terminal patients is to require that even when the agency grants access, the patient’s treatment must await review by an IRB.

An IRB is an independent board, often affiliated with a major medical or research institutions that must be registered with the FDA. An IRB is composed of at least five individuals with varied backgrounds, who review all IND applications for the purpose of protecting the welfare of human subjects undergoing clinical trials.⁹⁸IRB review is required for all IND applications before treatment may begin.⁹⁹

IND applications for single-patient use are subject to “full IRB review.” Full IRB review means that the IND must be considered at a convened meeting at which a majority of the IRB members are present, including at least one member whose primary concerns are in nonscientific areas.¹⁰⁰ To be allowed to proceed to treatment, the IND must be approved by a majority vote of the members present at the meeting.¹⁰¹ Although some IRBs at major academic institutions meet on a weekly basis, many IRBs meet only once a month. This can cause additional delays for a patient seeking the use of investigational medications, as treatment cannot begin before full IRB approval has been granted.

Additionally, the requirement for full IRB review creates a barrier for patients located in rural regions or who are being treated at smaller hospitals. Most IRBs are located at major academic research institutions and large hospitals, many of which prioritize the review of applications originating from within their own institution over outside applications. The FDA is aware of this barrier and in October of 2011 asked HHS’s Secretary’s Advisory Committee on Human Research Protection (SACHRP) to study the issue.¹⁰² The report generated by SACHRP stated that “substantial barriers” exist that inhibit access to investigational drugs and that these barriers are “exacerbated for physicians and patients outside of an institutional setting” in large part because of the requirement of full IRB review.¹⁰³ Thus, the practical result of the IRB requirement is that patients in rural areas or who otherwise lack access to large medical institutions will, in many cases, lack the opportunity to obtain expanded access to investigational medications. The American Pharmacists Association describes the requirement of full IRB review as “prohibitively costly” and “burdensome,” and asserts its firmly held belief that the requirement “creates an impossible and undue burden on medical doctors treating individual patients in a community clinical setting.”¹⁰⁴

The FDA’s requirement for full IRB review of all applications for single-patient INDs delays and limits access to investigational medications. The FDA itself recently noted that the agency “is aware of concerns that this requirement for full IRB review may deter individual patient access to investigational drugs for treatment use,” especially for patients “in settings in which IRB review is not readily accessible (e.g., healthcare settings that do not have IRBs).”¹⁰⁵

Bureaucratic Delays Endanger Lives

The FDA’s long, costly, and burdensome process makes it difficult for patients to get the medications that may save their lives. Take the case of Everett Davis. At the age of 17, he was diagnosed with paroxysmal nocturnal hemoglobinuria (PNH).¹⁰⁶ The disease caused the formation of major blood clots and caused his kidneys to fail. For two years, his condition escalated until his hematologist was convinced his only chance for survival was an investigational drug called Soliris. After Davis and his family made countless calls to lawmakers to seek assistance in obtaining access to Soliris, Davis was eventually granted expanded access. The drug was so successful in improving his condition that within weeks Davis was approved for the transplant list that had previously been denied him. Luckily for Davis, his expanded access approval “came at the exact right moment” and the medication followed by the transplant saved his life.¹⁰⁷ Sadly, many are not as fortunate.

Dr. Mark Puder of Boston Children’s Hospital has spent years treating infants who have fatal liver disease using a promising investigational medication called Omegaven.¹⁰⁸ The FDA has permitted the medication to be given to patients through an expanded access program. A former FDA official, Dr. Timothy Cote, argues that the FDA’s expanded access application process is appropriate even in cases such as this where an infant is facing death.¹⁰⁹ But a bureaucratic delay of weeks or months can mean the difference between life and death. As Dr. Puder explained, “The problem with this disease is it’s so rapidly progressive that you may lose the time to be able to rescue them. So, if their liver disease is bad at two months, and then it’s at four months now, you’ve hit a point where there’s a point of no return.”¹¹⁰

Patients and their families should not have to wait for bureaucratic whims to turn in their favor. When patients are facing terminal diseases, every day counts. Each extra day that it takes a doctor to fill out copious amounts of administrative paperwork, a bureaucrat to review an application, or to get on the schedule for an IRB, brings the patient a day closer to death and gives the possibly life-saving medications less time to work. Such procedural delays and hurdles threaten the lives of patients and should not be tolerated. We must move to protect the right of patients to access potentially life-saving medications.

Resisting Change

The FDA is extremely sensitive to the fact that every time it approves a new medication, the agency puts its reputation and power at risk. If the medication should later prove dangerous, the FDA will come under intense scrutiny from the media and Congress. In contrast, if the FDA is slow to approve a new medication, insisting upon more and more testing, the risk of scrutiny is much lower. This makes the distinction between the FDA committing a type one versus a type two error very important.

A type one error occurs when the agency approves a medication that is later discovered to produce serious side effects. In the case of a type one error, victims are clearly identifiable and visible to both the media and lawmakers. While the FDA can take corrective action, the damage to the agency’s reputation will have already been done as it faces media and legal scrutiny. Dr. Henry Miller, the founding director of the FDA’s Office of Biotechnology, illustrated the deep-seated fear the agency has of these type one errors. Dr. Miller described an instance in which he possessed reams of data detailing both the efficacy and safety of a new drug only to have his supervisor hedge on the approval after two and a half years of clinical trials, stating, “If anything goes wrong, think how bad it will look that we approved the drug so quickly.”¹¹¹

A type two error occurs when the agency moves slowly and delays approving a beneficial medication. Although a type two error will result in needless deaths as patients await approval of the medication, the victims are largely unidentifiable. Without identifiable victims to be paraded in front of the cameras or a congressional committee, the danger to the FDA’s reputation is significantly less.

As underscored by Dr. Miller, the FDA is aware of the comparative danger to its reputation posed by type one and type two errors. The agency’s sensitivity to this issue is clearly reflected in the statements of former FDA Commissioner Alexander Schmidt who noted “in all our FDA history, we are unable to find a single instance where a Congressional committee investigated the failure of the FDA to approve a new drug. But the times when hearings have been held to criticize our approval of a new drug have been so frequent that we have not been able to count them.”¹¹²

Legislators Must Act to Protect Patients

“The decision on what course of action to take is the patient’s. After given the facts, if someone with a life-threatening or terminal illness wants to seek treatments that may offer a cure or slowdown in the progression of disease, then Federal agencies and red tape should not stand in their way.” ~ Congressman Dan Burton (R-CA)¹¹³

The delays and denials, which are inherent in the FDA’s current expanded access policy, have prompted recent attempts at the federal level to broaden access for terminal patients. Since 2008, four such bills have been introduced in Congress.¹¹⁴ Although these bills all had bi-partisan sponsors, none received a vote in committee, let alone a floor vote.

Despite such federal inaction, there is no right more basic than the right of the individual to protect his or her own life. The law recognizes this natural right by acknowledging a person’s right to self-defense. Individuals have the right to defend their lives. Through the lengthy approval process, the government has effectively denied the individual’s right to try to preserve his or her own life.

To protect the rights of patients with immediately life-threatening conditions, states should pass “Right to Try” legislation. Right to Try declares that the right of a terminal patient to access available investigational medications, devices, or biological products is a fundamental right and prohibits any government or government agent from interfering with that right.¹¹⁵

The Right to Try model legislation (Appendix A) designed by the Goldwater Institute is narrowly tailored and addresses many of the concerns that the FDA and others have expressed. To address the legitimate government interest of protecting the lives of citizens, Right to Try only allows access to medications that have passed basic safety testing (Phase I).¹¹⁶ Further, this legislation does not allow unfettered access to such medications after Phase I. It is limited to investigational medications for terminal patients who have exhausted other available treatments.¹¹⁷Finally, the investigational medications are only available to patients under Right to Try if the sponsoring company chooses to make them available.¹¹⁸

Simply stated, Right to Try allows a patient to access investigational medications that have passed basic safety tests without interference by the government when the following conditions are met:¹¹⁹

1.) The patient has been diagnosed with a terminal disease;¹²⁰

2.) the patient has considered all available treatment options;¹²¹

3.) the patient’s doctor has recommended that the investigational drug, device, or biological product represents the patient’s best chance at survival;¹²²

4.) the patient or the patient’s guardian has provided informed consent;¹²³ and

5.) the sponsoring company chooses to make the investigational drug available to patients outside the clinical trial.¹²⁴

For patients suffering from conditions for which there is no approved known cure, the FDA’s traditional role of protecting patients from drugs and devices that have not yet proven effective has little meaning. These medications have already been deemed safe enough to enlarge the group of patients involved in the clinical trial to several hundred or even several thousand individuals. The requirement for informed consent ensures that terminal patients considering this option are fully aware of the risks involved. Moreover, allowing earlier access to investigational medications with informed consent is supported by the medical community. Recent studies show that a clear majority of specialists, including neurologists, oncologists, orthopedic surgeons, and emergency-room doctors support making investigational drugs available prior to full FDA approval.¹²⁵ Further, the Right to Try initiative allows the company producing the investigational medication or device to determine whether it will be made available.¹²⁶ If a company does not wish to make a medication available due to lack of adequate inventory, fear of liability, or any other reason, the company is not compelled to do so. Furthermore, insurance companies are not compelled to provide coverage for investigational medications.¹²⁷ Thus, Right to Try protects a patient’s right to medical autonomy without infringing on a company’s rights.

Constitutional Right to Medical Autonomy

It has long been established that the U.S. Constitution creates a floor of protection for individual rights – not a ceiling. States can and do provide additional and enhanced protections for individuals. For example, several states provide greater protections for speech or privacy than the U.S. Constitution does.

Additionally, the U.S. Supreme Court has recognized a series of fundamental rights protected by the Due Process Clause. These constitutionally protected rights include the right to marry, to use contraceptive medications, to live with one’s family, and to teach children a foreign language.¹²⁸ Among the recognized fundamental rights, the Supreme Court has recognized several fundamental liberty interests in the area of medical autonomy. The right of a patient to control his own medical treatment has been a component of many due process cases, with the Supreme Court noting the existence of the “right to care for one’s health and person.”¹²⁹ Although the right of terminal patients to access investigational medications has not yet been recognized by the Supreme Court, it is consistent with and can be supported by existing precedent.

If Right to Try is upheld, the government would be restricted from placing excessive regulatory requirements on terminal patients seeking access to investigational medications. The result is that the FDA would not be able to prevent a terminally ill patient who met the stated criteria from accessing investigational medications. Likewise, other procedural burdens such as the IND application and IRB review requirement could be deemed undue burdens and either eliminated or drastically curtailed.

The concept of ordered liberty cannot include allowing a government agency to promulgate and enforce regulations that impair an individual’s health or cause death by denying or delaying access to potentially life-saving medications. The way in which the FDA currently regulates access to investigational medications may be rational for non-terminal patients, but its application to terminal patients, who lack other treatment options, is not. Preventing such a patient from accessing a potentially life-saving medication will, without question, result in the fulfillment of the diagnosis — death.

Without state action, terminal patients are at the mercy of a federal bureaucracy that can literally cause death by delays, denials, and unnecessary procedural requirements.

Conclusion

From her sickbed, Edie Bacon wrote of the travails a terminal patient faces and made a final plea for the only medication that might save her. “The government wants proof of efficacy before it will allow me to take this drug outside of an approved trial. But the ‘proof’ is years away, and I need the drug now. It’s safe. It might work. Johnson & Johnson would let me have it if they could do so without the threat of a government hassle. But they’re so caught up in the FDA web that the life of an individual patient has no importance whatsoever. Without ET 743, I’m a dead woman walking. Five kids are going to wonder why they’re left without a mother. Won’t somebody help me get this drug?”¹³⁰ Edie died two years later, but there are thousands of patients who face this same battle every day – patients who have to make the same pleas that Edie did for a chance to try to protect their own lives.

Such pleas should anger anyone who believes in the concept of personal liberty. No free person should have to come to the government as a supplicant to beg for a right to try to save his or her own life. In a country dedicated to the idea that all people have certain “unalienable Rights, that among these are Life, Liberty, and the Pursuit of Happiness,” no government official should have the power to deny a person’s last chance at all three – life, liberty, and happiness.¹³¹Yet that is the power the FDA wields today. States should challenge this regulatory authority by passing Right to Try and returning medical decision making back to the rightful hands of patients and doctors.

References

>>Read the Full PDF Report Here<<

For patients suffering from terminal illnesses, the federal Food and Drug Administration (FDA) is the arbiter of life and death. These patients, suffering from diseases ranging from ALS to Zellweger Syndrome, face little chance of recovery. For patients like Kianna, investigational medicines provide a glimmer of hope. The FDA, however, often stands between the patients and the treatments that may alleviate their symptoms or provide a cure. To access these treatments, patients must either go through a lengthy FDA exemption process or wait for the treatments to receive FDA approval, which can take a decade or more and cost hundreds of millions of dollars. Sadly, over half a million cancer patients and thousands of patients with other terminal illnesses die each year as the bureaucratic wheels at the FDA slowly turn.Tuesday, February 11, 2014 - 09:44Everyone Deserves the Right to TryEmpowering Patients to Save Their Own LivesHealthcare Freedom Report Policy Report IssueYes Polling.pdf Cost of FDA Approval.pdf Proposed Statutory Language.pdf Polls.pdf Right To Try.pdf R.pdfBy TopicsChristina Corieritrue

A Vision for Education and the Future of Learning

bwilson — Tue, 18 Feb 2014 16:50:03 +0000

In 1999, Professor Sugata Mitra installed a computer on a sidewalk in the poor neighborhood of Kalkaji, India.¹ Mitra observed the children who discovered his so-called “hole-in-the-wall” computer and asked them what they thought about the machine. Mitra, whose experiments inspired the story behind the Oscar-winning film Slumdog Millionaire, expected the children to have questions about how to use a computer and what they were supposed to do with it. Instead, the children taught themselves how to use the keyboard and navigate the Internet—in English. They didn’t ask for instructions, they wanted a faster processor and a better mouse.

Mitra repeated his experiment in several other Indian villages, and, again, children taught themselves how to use the computer and learned skills and information that schools in the West have been teaching for decades. Mitra explains that his discovery taught him that while it may be “fashionable” to say that the school system in the West is broken, it’s more accurate to say that it’s obsolete.² “It’s just that we don’t need it anymore. It’s outdated,” he says.

Decades of stagnant student test scores and underwhelming high school graduation rates in Arizona and around the country substantiate Mitra’s isolated findings. Traditional classrooms cannot equip every child for whatever their unique future holds, whether they move on to college or enter the job market. In fact, school, as we have known it, may be part of the problem. Students shouldn’t be assigned to a school based on their ZIP code. They should be free to choose the best classes, tutors, or extracurricular activities from a menu of options online or in traditional classrooms, no matter where they live.

To give every child great educational opportunities, the future of learning must be based on four pillars:

• Every student should be eligible to choose the best school or set of classes from different schools and learning centers;

• Students should have access to self-paced instructional tools;

• Education funding should be student- and parent-directed and based on student outcomes;

• And students should be able to combine the credits earned in classes held at different schools and learning centers to complete their course of study.

Arizona has only started to unlock the potential of flexible, challenging educational innovations that focus on student needs and not on a system of public schools. This paper explains what the future of learning should look like and provides examples from states that are taking bold steps into the future like Arizona, Louisiana, Florida, and Utah, along with schools around the country using groundbreaking instructional methods.

Introduction

Mitra’s “hole-in-the-wall” experiments started with a simple question: “What is going to be the future of learning?”³ After documenting case after case of children in the slums of India using a computer to teach themselves complicated material in a language foreign to them, he had a new question: “Could it be that we don’t need to go to school at all?”

Now, travel halfway around the globe to the United States and imagine sitting with your child at the dinner table and preparing for the new school year. But instead of reading a letter telling you what school your child is assigned to, you have a menu of schools, classes, tutors, and extracurricular activities to choose from, some located nearby and others online. This educational directory lists such options as virtual classes, schools that focus on the liberal arts, classes in computer programming, and even lessons taught in another language.

You select math, English, and art classes offered by a local charter school, where your child will sit with friends she’s had all of her life. In the afternoon, she’ll study Spanish and music online and prepare for the SAT in an evening class at a nearby private school. She swims on the swim team at the neighborhood traditional school twice a week.⁴

>>Read the PDF report here<<

New technology and bold legislative advances in educational choice are bringing us closer to the day when this hypothetical dinner-table exercise becomes a reality for every family. However, this vision for the future is a sharp contrast to the factory model of education we have come to accept. We have grown accustomed to the routine of parents sending their children to an assigned public school, and these schools employ administrators, teachers, and other staff who receive their pay regardless of how many children learn to read or drop out of high school. The question for parents and their students in the next generation must change from “Where do we go to school?” to “How do we want to learn?”

Out with the Traditional School, in with More Options

Students must learn marketable skills they can use to enter the workforce, attend college, go to graduate school, or pursue whatever opportunities are available to them. What a student learns is more important than just going to school. According to the Arizona Department of Administration, 20 of the fastest-growing occupations in the state are heavily populated by science- and math-intensive fields: biomedical engineering, network systems and data communications analysis, medical science, and radiation therapy, to name a few.⁶ Yet only two states rank lower than Arizona on a national science test comparison for 8th graders, and only four states score lower than Arizona in a 4th grade national math comparison.⁷ Individuals with lower levels of educational attainment have fewer choices in life, just like those who attend schools that do not prepare them for work in fields where jobs are available. This burden creates more disparity in societies around the globe. School, as we know it, has not bridged the divide between students performing at different achievement levels because every child learns material at a different pace.

Figure 1: Arizona Department of Administration, Fast-Growing Occupations in Arizona 2008-20188

Source: Arizona Department of Administration, “Fast Growing Occupations in Arizona ’08-’18,” http://www.azstats.gov/pubs/labor/FastGroOccs.pdf.

Evidence from student test scores and high school dropout and graduation rates indicate that education is due for an upgrade. Arizona student test scores in math and reading on the Nation’s Report Card have been unchanged for decades, and Arizona is in the middle of the pack when it comes to graduation rates. Arizona’s average annual improvement in the state’s graduation rate between 2006 and 2010 is positive, though still near the middle of U.S. states (20th), but Arizona’s freshman graduation rate (how many freshman from the class of 2006 graduated in 2010) ranks 42nd in the country.⁹

Compared to the national average, Arizona students are also not taking the kind of classes that will challenge and prepare them for the jobs in the employment sectors listed above. Arizona’s student participation rates in Advanced Placement courses, college-level courses taught in high school, and college entrance exams are well below the national average.

Figure 2

Source: The College Board, “The 9th Annual AP Report to the Nation,” February 13, 2013, http://media.collegeboard.com/digitalServices/pdf/ap/rtn/9th-annual/9th-..., p. 36; The College Board, “The SAT Report on College & Career Readiness: 2012,” http://media.collegeboard.com/homeOrg/content/pdf/sat-report-college-car..., author calculations; ACT, “2012 ACT National and State Scores: Average Scores by State,” http://www.act.org/newsroom/data/2012/states.html.

Around the United States and the world, the way in which students are educated through the traditional school system cannot change fast enough. Education is a critical predictor of a person’s future quality of life, no matter where he lives. The OECD reports that the unemployment gap between individuals with different levels of educational attainment grew between 2008 and 2011.¹⁰ Around the world, individuals with lower levels of education saw their unemployment rate grow by 3.8 percentage points. Critically, during the recent financial recession, data showed that completing coursework was not as important as which courses a student completed and what he learned in those classes:

The changes in enrollment rates, employment rates and investment in education observed in the first years of the recession indicate how . . . individuals, families and societies as a whole fared during the most challenging economic and social crisis in recent history. Highly educated young people from fields of study in high demand found a job easily . . . and could envisage a prosperous life ahead of them. For others, a tertiary qualification [college degree] did not bring the expected rewards, either because the labour market was contracting too much—often protecting older generations at the expense of the youngest generation of workers—or because their chosen field of study was already saturated or not aligned with the needs of the labour market.¹¹

Parents and legislators must give tomorrow’s students the opportunity to reverse these trends of low test scores and the lost opportunities because of mediocre graduation rates and too few students taking challenging course material. Students need more than just an assigned school and more than even choices between schools—they need choices between challenging classes, extracurricular activities, and other educational options.

We need to build an educational future for our children based on four pillars:

• Every student should be eligible to choose the best school or set of classes from different schools and learning centers;

• Students should have access to self-paced instructional tools;

• Education funding should be student- and parent-directed and based on student outcomes;

• And students should be able to combine the credits earned in classes held at different schools and learning centers to complete their course of study.

Every Educational Choice Should be Available Anywhere, to Everyone

Education savings accounts in Arizona are making school-assignment and seat-time requirements things of the past. The accounts give students choices between schools, individual classes, tutors, and extracurricular activities like academic clubs. Launched in 2011, the Arizona Department of Education awards eligible families a bank account worth 90 percent of the state portion of a child’s per student funding from the school funding formula.¹² Parents can use the accounts to enroll their child in an online class, buy textbooks, pay tuition at a K-12 private school, pay for individual public school classes, hire a personal tutor, or even pay for college. One of the accounts’ most distinctive features is the number of options parents have for their child’s education.

Families have taken advantage of the accounts’ flexibility in creative ways. Savings account families subscribe to online education websites such as BrainPOP, for example, that can be accessed anytime, and some families have bought Saxon curriculum materials to use for homeschool, along with Rosetta Stone software to help with foreign language instruction.¹³ Families are keeping unused funds from year to year, saving for their child’s college tuition, and hiring individual help for their student in different subjects.¹⁴

Lawmakers in other states are following Arizona’s example. In the past two years, legislators in Florida, Iowa, Montana, Utah, Oklahoma, and Missouri have introduced education savings account legislation, though the bills have not progressed.¹⁵ One state has even given parents the flexibility to use tax-credit scholarship funds for different purchases. Under tax-credit scholarship laws in place in 11 states, including Arizona, individuals and businesses donate funds to charitable scholarship-granting organizations. The scholarship organizations award private school scholarship to K-12 students. Since 2012, New Hampshire students have been able to use K-12 private school scholarships to either find a school that meets their needs or pay for homeschool expenses.¹⁶ New Hampshire’s scholarships are similar to Arizona’s education savings accounts because Granite State families can use their scholarship money to buy homeschool materials and textbooks or to pay private school tuition, allowing them to choose where and how their child learns.¹⁷

New Hampshire’s law is a significant upgrade to private school scholarship laws around the country. Other states that have enacted scholarship tax credit laws, such as Florida, Iowa, and Georgia, have designed the provisions to help families pay private school tuition. Education savings accounts and, to a limited degree, New Hampshire’s scholarships help parents meet a child’s needs through more than just the choice of a school. Families have the flexibility to meet their child’s unique needs through the purchase of different educational products and services.

Another distinctive feature of Arizona’s savings accounts and the K-12 school vouchers available in Indiana and Louisiana is that hundreds of thousands of students are eligible to use the accounts and vouchers. In nearly every state that allows students to use vouchers or scholarships to attend private school, the scholarships are only available to students who meet certain criteria. For 20 years, the nation’s oldest voucher program, in Milwaukee, Wisconsin, was limited to students in the school district who met certain income restrictions.¹⁸ In 2012, lawmakers expanded student eligibility to include children in Racine (located 30 miles south of Milwaukee), and in 2013, legislators changed state law to include any student in the state who is eligible for the free and reduced-priced lunch program. However, the new law only allows 500 students outside of Milwaukee or Racine to participate in the 2013-14 school year. Likewise, in Mississippi, only children with dyslexia are eligible for scholarships, and school vouchers in Douglas County, Colorado, are capped at 500 available slots.¹⁹ These limitations mean some but not all children who need better options have the chance at a successful future. Every child should be eligible for educational innovations that give them the chance at a great education.

In 2011, Indiana lawmakers made more children eligible for school vouchers than any other state’s scholarship program.²⁰ Some 530,000 Indiana children are eligible for vouchers, and more children applied for a voucher in the program’s first year than in the first year of any K-12 scholarship program in U.S. history (3,919).²¹ Indiana children from low- and middle-income families are eligible for a full or partial scholarship. In Louisiana, 380,000 state children are eligible for school vouchers.²² Approximately 1 in 5 Arizona public school students is eligible for an education savings account, a total of more than 220,000 children.23 Eligible Arizona students are: special-needs children, children assigned to schools that earned a “D” or “F” on the schools’ state report card, children of active-duty military families, and children adopted from the state foster care system. Incoming kindergarten students that meet any of these criteria are also eligible for an account. In order for all children to have the chance at a superior education, lawmakers must give all students more options than their assigned public schools and not limit school choice laws to select student populations or restrict participation with modest enrollment caps.

Figure 3: Public School Enrollment in Arizona, Indiana, and Louisiana vs. Student Eligibility for Educational Choices

Source: National Center for Education Statistics, “2012 Digest of Education Statistics: Table 36: Enrollment in Public Elementary and Secondary Schools, by region, state, or jurisdiction: Selected years, fall 1990 through fall 2021,” http://nces.ed.gov/programs/digest/d12/tables/dt12_036.asp.

School choice will not level the playing field for all students if only students that meet certain income- or special-needs-related categories are eligible. The disparities between students from different backgrounds will remain as long as only a few children can choose a school that fits their needs. If access to innovative educational options—or any options at all—is limited, the resulting student success will be limited. These restrictions must become a thing of the past if a great education is to become a reality for all students.

Self-Paced Instruction

“Education technology” used to mean the number of computers in a classroom. And for years, education leaders around the country added computers to their schools. The ratio of children to computers with Internet access was more than halved between 2000 and 2008 (from 6.6 students per computer to 3.1).²⁴ The percentage of classrooms with Internet access jumped from 8 percent in 1995 to 94 percent in 2005.

Figure 4: Percent of Public School Classrooms with Internet Access, 1995 vs. 2005

Source: National Center for Education Statistics, 2012 Digest of Education Statistics, “Table 109: Number and internet access of instructional computers and rooms in public schools, by selected school characteristics: Selected years, 1995 through 2008,” http://nces.ed.gov/programs/digest/d11/tables/dt11_109.asp.

Michael Horn, co-founder and executive director of the Clayton Christensen Institute for Disruptive Innovation, and Meg Evans, Program Associate at the Christensen Institute, explain that putting more computers in the classroom did not necessarily change what happened in the classroom: “To the extent that [the public school system] has employed technology, it has done so to sustain and reinforce its factory-model processes, not to fundamentally change them.”²⁵

International data confirm this finding. In The Smartest Kids in the World, Amanda Ripley reports that a survey of 202 exchange students from 15 countries found that students “overwhelmingly agreed that they saw more technology in U.S. schools [than schools in their home countries].”²⁶ Ripley adds that “even students from high-performing countries said they saw more technology in their U.S. classrooms than back home” and “seven out of ten American teenagers who had been abroad agreed.” Just because classrooms have computers does not mean that students are more likely to learn what they are being taught.

Instead, we must consider education technology as any hardware or teaching techniques that help students learn more material, better and faster, Horn says. For example, Summit Prep charter school in Redwood City, California, has replaced requirements on how many hours a student is required to attend class with self-paced instruction using online tools.²⁷ Summit employs a hybrid learning model where students spend part of each day with a self-paced online program and part of the day in a classroom. Carpe Diem Collegiate High School, a charter school in Yuma, Arizona also uses a hybrid instructional method.²⁸

Summit children set goals for themselves when they begin their online exercises and are free to choose from a playlist of different online educational applications. Similar to shopping at an Apple computer store, where customers go to the Genius Bar to get help from technicians, students can visit a tutoring bar for extra help. They interact with teachers and other students in breakout sessions. Once a student has finished his assignments, he takes an online test to see if he’s met the goals he set earlier in the day. Teachers’ roles at Summit are different from a teacher’s role in a traditional classroom. Summit teachers act as a student’s team member as he makes his way through new material and demonstrates that he understand the lessons.²⁹

Forty-two percent of Summit students qualify for the free or reduced-price lunch program, and the school has a 94 percent on-time graduation rate.³⁰ The Daily Beast named Summit one of its 10 “Miracle High Schools,” and the school is ranked 11th in California according to U.S. News & World Report.³¹ Summit’s hybrid model gives students the flexibility they need to learn at their own pace using both online tools and person-to-person interactions, making more effective use of both computers and people.

Online learning pioneer Salman Khan and his Khan Academy helped inspire Summit’s new instructional method. Khan Academy started as a YouTube channel with educational videos but is now a fully-functioning, free online resource where students watch lessons, take quizzes, and track their progress, and teachers can monitor the progress of all the students in their classes. As featured on 60 Minutes and supported by Silicon Valley icon Bill Gates and corporate titans like Google, Khan Academy features 4,500 videos for students on subjects ranging from multiplication to the French Revolution.³² Students sign in to the site with their email address and set up an account, and the site tracks their progress through different lessons. The entire Los Altos School District, in Santa Clara County, California, along with students at Summit Prep, KIPP Academies around the country, Eastside Prep in Palo Alto, California, and Oakland Unity Charter School in Oakland, California use Khan Academy as a part of their school day.³³ Los Altos students watch lectures and videos at home, then come to school the next day to work on their assignments (commonly referred to as a “flipped classroom”). In class, teachers review the lesson from the previous evening and help students as they finish their exercises.

Students that struggle with different subjects can spend more time on the material, while others in the class can move on to the next topic. “The benefits allowed teachers to rethink instructional time, and we are actually finding that we have more time,” says Alyssa Gallagher, Los Altos assistant district superintendent.³⁴ “Teachers aren’t spending time on skills that students already know.”

Business would proceed at a snail’s pace if every employee had to wait for all of their co-workers to finish the same task before moving on to the next step or a new project. Teachers in traditional classrooms are forced to decide whether to move on to new material before every student has caught up or wait until every student demonstrates that they understand the material before moving on. Either way, some children in a class are going to struggle. Every child is different, and the future of learning will be defined by education technology that allows them to move at their own pace.

Education Funding and Student Outcomes

Traditionally, taxpayers fund public schools based on the number of students enrolled. Arizona’s traditional school finance formula is no exception and is woefully outdated. Schools report enrollment near the end of a school year, and the state pays schools in the next school year based on the prior year’s enrollment.³⁵ In Arizona, $125 million taxpayer dollars are wasted as children change schools from year to year or during the school year, and the state pays schools regardless of whether a student learns subject material.

As more states, including Arizona, allow students to take courses online, use an education savings account, or attend private school using a voucher, states must adapt their outdated formulas to take into account these choices. Traditional school funding systems struggle to account for virtual school funding, in particular. Arizona has 52 virtual programs enrolling 30,000 students, and 1.8 million students take distance learning courses nationwide (275,000 students are enrolled in full-time online schools).³⁶ Students enrolled in online courses may not complete coursework for weeks before they are deemed truant or to have dropped out. State treasuries pay virtual schools even if students disappear in cyberspace, and students may re-enroll in a traditional school having not done any work at their online school. As a result, taxpayers pay twice for a student to take the same class, which is not only expensive but creates havoc in state academic accountability systems. Student information systems based exclusively on traditional school enrollment are not sophisticated enough to account for student mobility.

Arizona’s education savings accounts are more effective than state-managed student databases at facilitating school, course, and extracurricular choices and school funding. As explained above, the state deposits student account funds directly in the account, eliminating the need for state computer systems to track where a student is learning at any given time. Account holders make purchases using a debit card or PayPal. The accounts replace bureaucratic, centralized student information systems with a financing tool that resembles a personal bank account.

States that have not yet adopted education savings accounts have found other unique ways to pay for online classes based on student course completion. The Florida Virtual School was the nation’s first model for incentive-based online school funding. Florida pays the state virtual school, the nation’s largest online K-12 course provider, for in-state students only after the student successfully finishes a class (Florida Virtual School offers classes for students living anywhere in the country, and out-of-state students pay tuition).³⁷ In 2008-2009, the state paid Florida Virtual $1,054 for each course credit earned. Florida Virtual has both full- and part-time programs, and the school enrolls students from all 50 states and 57 countries.

In 2011, Utah enacted a similar funding model for all of the state’s online course providers and pays online schools based on student course completion. Utah students can enroll in up to three classes online per year from providers anywhere in the state, including online charter schools and school district virtual classes.³⁸ Online schools receive half of a child’s funding when the child enrolls and the remainder when he finishes the course.³⁹ Critically, state law requires that a child’s school automatically accepts credits earned through an online course. In Arizona, state law allows districts to prohibit students from earning credits online, and some Arizona school districts, including Scottsdale Unified School District, Chandler Unified School District, and Deer Valley Unified School District, adopted policies that limit a student’s online course options.⁴⁰

Arizona’s education savings accounts, Florida’s statewide virtual school, and Utah’s funding system for online classes are more efficient funding methods for students and taxpayers and eliminate much of the waste in centralized databases. Schools have the incentive to offer classes and services that parents and their children need and make sure children finish their coursework, and taxpayers only fund schools if a course provider successfully helps a child learn.

Individual Course Selection

In June 2013, Louisiana joined Arizona in making it possible for students to select individual courses and no longer limits what a child can learn by what is inside classroom walls in their assigned schools. The Louisiana State Board of Education approved $2 million for the Louisiana Course Choice pilot program, which allows students to choose from a menu of classes anywhere in the state.⁴¹ Parents and students visit the course-choice Internet homepage, select their desired class and enter their ZIP code, and the website generates all of the options for a specific course at schools located nearby or from online schools.⁴² Options available to Louisiana students include Florida Virtual School classes, courses from the online school K12 Inc., and in-person as well as virtual classes at nearby public and private schools. School counselors are available over the phone to help families select the appropriate course levels and navigate through the selection process.⁴³ The state will cover enrollment costs for traditional and charter public school students, while private school and homeschool students must pay tuition.

Figure 5: Louisiana Course Choice Screenshot

Source: Louisiana Course Choice, http://www.louisianacoursechoice.net.

Louisiana’s database includes 42 course providers in more than 90 locations. These courses include Advanced Placement classes, gifted courses, ACT preparation classes, and classes at all state colleges and universities. Similar to the Florida Virtual School, Louisiana does not pay course providers the full per-student amount unless the child finishes a course on time. More than 2,000 students have enrolled for the 2013-14 school year.⁴⁴

Louisiana’s course choice and Arizona’s education savings accounts put education at a student’s fingertips instead of requiring a student to go to one location for a certain number of hours. This creates life-changing options for disadvantaged children and students in rural areas that may not have easy access to high-quality classes in their hometowns. The College Board reports that only 33.7 percent of U.S. public schools offer Advanced Placement or International Baccalaureate classes in the core subjects of English, math, science, and social studies.⁴⁵ This means that two-thirds of public school children in the United States, approximately 37 million students, are excluded from the most challenging classes available to them—classes that would help them prepare for higher education or the employment opportunities in technical fields such as those available in Arizona cited earlier.

Louisiana’s course choice system is a model of how to give every child access to challenging classes and reduce the disparities between children living in different geographic areas and at different income levels. Lawmakers in every state should create a database of classes and make the options available to families. Arizona’s education savings accounts would facilitate a payment system for the classes, and parents could use their child’s account to pay for the courses. The accounts’ flexibility will also allow families to pay for tutoring services, standardized test fees, and other curricular or extracurricular activities that will help meet every child’s unique needs.

Building a Future on these Four Pillars

There is more evidence to demonstrate the value of flexibility and choices in education than the findings from Professor Mitra’s colorful experiments. As lawmakers consider the four ambitious ideas described in this paper to give more children the chance at a bright future, they should build the case for change on findings from school choice research such as:

• While traditional school student test scores have shown little improvement in reading and no improvement in math since 1973, charter school students around the country have shown steady improvement. In a study of 1.5 million charter school students, Stanford University researchers found that the average charter school student posted achievement scores that are the equivalent of eight additional days of learning in reading compared to peers at traditional schools. This is a significant improvement from 2009, when the same researchers found that charter students posted scores that were the equivalent of seven fewer days of learning.⁴⁶

• Goldwater Institute research found that a higher percentage of Arizona charter schools earned an “A” on their state report card in both 2011 and 2012.47 These report card grades are based on year-to-year student achievement on the state test and the improvement among the lowest-performing 25 percent of a school’s students.

• In the first study of the impact of school vouchers on college attendance, researchers found that African American students using a privately funded school voucher in New York City saw college-enrollment rates increase by 7 percentage points. For African American students that used a voucher for even a few years, their college-enrollment rate increased by 24 percent over their peers at traditional schools.⁴⁸

• Researchers found that Washington, D.C. students using a voucher to attend private school were significantly more likely than their peers not using vouchers to graduate from high school.⁴⁹ Similar positive effects on graduation were found among students using a voucher in Milwaukee, Wisconsin.⁵⁰

• Without exception, school voucher and tax credit scholarship awards cost taxpayers less than the average public school spending per child in the 50 states. In some cases, scholarship awards are half the size of average per student spending.⁵¹

Figure 6: Arizona Average Tax Credit Scholarships, Education Savings Account, and Charter School Average Student Awards vs. Average per Student Funding at Traditional Schools

Source: Arizona Joint Legislative Budget Committee, “Overview of K-12 Per Pupil Funding for School Districts and Charter Schools,” September 6, 2013, http://www.azleg.gov/jlbc/districtvscharterfunding.pdf; Arizona Department of Revenue, “Private School Tuition Organization Income Tax Credits in Arizona: A Summary of Activity FY 2012,” http://www.azdor.gov/Portals/0/Reports/FY2012%20private%20schl%20tuition..., and author estimates based on Fifty-first Arizona Legislature, First Regular Session, SB 1363, http://www.azleg.gov/DocumentsForBill.asp?Bill_Number=1363&Session_Id=11..., and e-mail communication with the Arizona Department of Education, August 13, 2013. Author calculations. Note: Special-needs student average funding is not included in the education savings account figure provided in this graph. Arizona funds special-needs students in traditional schools and using a savings account at a higher level than the statewide per student average. Education savings accounts are still worth 90 percent of the state funding that would have been used for a special-needs child in a traditional or charter school.

For more than 15 years, researchers have documented how school choice gives parents more flexibility to meet their children’s needs and promotes student achievement. Arizona is a national leader in school choice, but as explained above, student eligibility for education savings accounts is still based on certain criteria. Other states with similar programs also limit participation. Limited participation can only result in limited results and limited cost-savings.

Policy Recommendations

1. Make all children eligible for the future of learning. As states consider education savings accounts, course choice options, virtual schools, and private school scholarships, lawmakers should make these options available to all children, not just students that meet certain eligibility requirements. Just as every child is free to attend a public school, so should every child be free to choose from better opportunities that will meet their needs. And parents should not be limited to choices between schools for their children. Arizona, Florida, Utah, New Hampshire, and Louisiana have enacted flexible, innovative ways for parents and students to find a challenging education online, in the classroom, or through a combination of educational services.

2. Allow children to move at their own pace. “Flipped classrooms,” where children study at home using tools like Khan Academy and then complete coursework during the school day, and hybrid classrooms help schools make the most of computer hardware and teachers. Students should be free to earn course credit anywhere and finish classes when

they can demonstrate they have mastered the subject material.

3. Create student-based education funding systems. Lawmakers should use education savings accounts and Florida and Utah’s mastery-based student funding laws to guide them as they replace seat-time requirements with proficiency requirements. Students should not be rewarded for simply showing up each day, and states should not pay schools exclusively on student enrollment. Centralized databases that process school district and school payments have long outlived their usefulness, and states like Arizona, Florida, and Utah have found ways to give parents and students more control over education funding.

4. Move from school assignment to course selection. Arizona’s education savings accounts and Louisiana’s course choices elevate student needs above funding school systems. Students should have choices as to where they learn and how they learn. Savings accounts and online course databases give parents and students the freedom to evaluate their needs and determine how, when, and where a child will learn.

Conclusion

Processor Mitra’s experiments, along with new schools and educational tools such as the Khan Academy, flipped classrooms, online schools, and hybrid schools like Summit Prep, upend the notion that we must devote more resources, time, and training to traditional classrooms. Individuals and organizations around the world are taking notice. In February 2013, Mitra was awarded a $1 million prize to continue his work with Minimally Invasive Education.⁵² Khan Academy continues to add free content to their website with the help of charitable contributions, and more independent charter schools open every year to give parents more options than local traditional schools.

While we should not expect all students to thrive in a self-paced environment, neither should we expect all students to succeed in a structured classroom. Every child is unique, and decades of academic results show that a system of assigned schools does not meet the needs of every child. Children must be free to learn anywhere, anytime, using any resources—hardware, software, teachers, classrooms, and beyond—available to them.

Lawmakers in Arizona, Louisiana, and Utah, along with innovative schools in different parts of the country offer a glimpse of the next generation of educational innovation. Education savings accounts, course choices, and discrete online classes make children’s needs and skills the focus of education, not a system of schools.

Legislators and school officials must replace seat-time requirements, which require children to spend a certain number of hours at a desk each day, with policies that ask students to demonstrate proficiency in different subjects. Once a child has learned the material, they should be free to move on to the next level, regardless of where their peers are in the lesson. Taxpayers should fund classrooms only after students have demonstrated mastery over their subject material.

Schools should enhance a child’s access to educational opportunities, not require students to enter the same classroom for 180 days each year. Students should have the flexibility to learn wherever they want, whenever they want, from whomever they choose. This is the future of learning.

References

>>Read the PDF report here<<

A New Day for School Choice: Education Savings Accounts Turn 3 Years Old

bwilson — Mon, 16 Dec 2013 17:00:02 +0000

Tim and Lynn McMurray are not afraid of a challenge. And they don’t want their adopted children, Alicia, Uriah, and Valerie, to be afraid either. The McMurrays adopted the three children shortly after the kids were born. Tim and Lynn recognized each child had unique needs due to their biological parents’ substance abuse and neglect.

After enrolling the children at several public schools in Arizona and even a private school, the McMurrays were not satisfied with the care their children were receiving. Alicia, who struggles with the effects of fetal alcohol syndrome, was enrolled in a school that provided little more than “glorified babysitting,” Lynn says. Uriah and Valerie were bullied in class because they didn’t fit in.

“Their self-esteem was going low and I could see their future and they would turn to drugs and alcohol in a minute if I left them in a public school,” Lynn says. “They weren’t learning anything.”

In the 2013-14 school year, the McMurrays applied for education savings accounts for all three children. Alicia is eligible because of her special needs, while Uriah and Valerie are eligible because they were adopted from the state foster care system.

For three years, eligible Arizona families have had access to the accounts, which transfer public money to private bank accounts so parents can pay for educational services, including private school tuition. The accounts can also be used to pay for online classes, educational therapy, textbooks, and homeschool materials. Extra funds can be saved for college.

>>>Read the PDF version of this report

The accounts have changed the McMurrays’ lives. Lynn says that in the first three months, Alicia “learned more at home with us than in her prior school.” She adds that Uriah and Valerie “are so excited about learning now because the kids aren’t making fun of them.”

“We’re stepping up academically for these kids. It’s a huge challenge,” she notes.

This policy brief reviews the accounts’ first years of operation. Legislative changes since lawmakers enacted the accounts have given more children access, and in 2013, researchers conducted the first studies of how families are using the accounts. This brief will cover the new legislation and research, along with developments in a lawsuit that an Arizona teachers’ union and school boards’ association filed against the accounts. Finally, this report will offer three recommendations for education savings account expansion, fraud prevention, and academic transparency.

Introduction

Alicia, Uriah, and Valerie are three of the 761 children using education savings accounts in the 2013-14 school year (see Figure 1). Data from the Arizona Department of Education indicate that participation has grown steadily since 2011.

	Figure 1: Education Savings Account Participation in Arizona, 2011-12 to 2014-15 (Projected)

	Each school year, the number of new education savings accounts that the Arizona Department of Education approves may not exceed 0.5 percent of the total number of public school students in the state. In the 2014-15 school year, the total number of available new accounts is approximately 5,500. Source: Arizona Department of Education, “ESA Parent Handbook: Chapter II: Program History & Authority,” http://www.azed.gov/esa/files/2013/08/chapter-2.pdf.*

Though student enrollment was small in the program’s first year, more students are using savings accounts today than the number of students using scholarships or vouchers in Rhode Island, Utah, Oklahoma, and Mississippi (Mississippi is the only state from this list with a program that was enacted after education savings accounts became law in Arizona).

Arizona Gov. Jan Brewer signed education savings accounts (officially called “Empowerment Scholarship Accounts”) into law on April 12, 2011. A critical feature of the accounts is that they enable parents to purchase a variety of educational products and services. In recent superior and appellate court rulings, judges cited flexibility and variety as key features that make the accounts constitutional (see “Education Savings Account Lawsuit” below).

The high degree of flexibility that education savings accounts offer set them apart from other school choice reforms like vouchers or scholarship tax credits. A school voucher is a coupon or certificate awarded to parents or to a private school on behalf of a parent so that a child can attend a private school. A tax credit scholarship is a private school scholarship funded by individual or corporate contributions to scholarship-granting organizations. Vouchers, and most tax-credit scholarships, allow parents to choose between schools, a valuable alternative for families unsatisfied with their child’s assigned public school.

But education savings accounts were designed to be different from vouchers or scholarships and allow parents to do more than choose where their child is educated—they can choose how their child is educated.

With a savings account, parents can choose from a wide variety of online classes, personal tutors, educational therapies, textbooks, and private schools. In fact, parents do not have to send their children to private school at all. For example, They can use a combination of homeschool lessons, virtual school classes, and individual public school classes. As explained below in “Education Savings Account Research,” the first studies performed using data from education savings accounts found that parents are taking advantage of their freedom to choose from different options.

Kimber Cartwright helped start the message board for savings account families on Yahoo.com, and says the accounts’ flexibility has helped her son, David. “We’ve been able to choose what schools he goes to, what therapies, and even add extra curriculum to the private school that he’s in,” Kimber says.

Education Savings Accounts: Legislative History

When Gov. Brewer signed the savings accounts into law, Arizona’s 125,000 special needs children were made eligible to apply. Children were required to have an Individualized Education Program, Multidisciplinary Education Team report, or 504 plan in order to participate. These documents define a child’s special needs and outline the interventions needed to address their needs. In addition, children must have attended a public school in the prior school year.

Each account was worth 90 percent of a child’s portion of the Arizona school funding formula. The state department of education awarded the funds from a designated funding source for special needs children. In Arizona, special needs children are funded using a weighted system. The department multiplies 90 percent of the base funding amount, approximately $3,800, by a number assigned to a diagnosis. For example, the department has assigned children with a hearing impairment a funding weight of 4.771. The base amount, $3,800, is multiplied by the weight, 4.771, and the child receives approximately $16,000 in his education savings account. Account awards are distributed quarterly, so the department would deposit $4,000 in this hypothetical child’s account every three months.

In 2012, Arizona lawmakers changed the funding source from this designated account to the state general fund. This adjustment did not change the amount that students receive, but the adjustment did make it possible to expand the program to include children from public schools that earned a “D” or “F” on the state report card system, children adopted from Arizona’s foster care system, or children of parents who are active-duty members of the U.S. military. These students’ accounts are now funded through the school funding formula used for all public school students. This expansion increased the number of eligible students to over 200,000, or more than 1 in 5 Arizona public school children.

Figure 2: Education Savings Account Eligibility Expansion

Source: Jonathan Butcher, “Education Savings Accounts: Questions and Answers,” Goldwater Institute, March 12, 2012, http://goldwaterinstitute.org/article/education-savings-accounts-questio... Arizona Department of Education, “Special Education,” http://www.azed.gov/special-education/funding/data-management/2012-2013/; Fiftieth Arizona Legislature, First Regular Session, SB 1553, http://www.azleg.gov/DocumentsForBill.asp?Bill_Number=1553&Session_Id=10... Fiftieth Arizona Legislature, Second Regular Session, HB 2622, http://www.azleg.gov/DocumentsForBill.asp?Bill_Number=2622&Session_Id=10... Fifty-First Arizona Legislature, First Regular Session, SB 1363, http://www.azleg.gov/DocumentsForBill.asp?Bill_Number=1363&Session_Id=11....

As the program grew both in the numbers of children who were eligible and participating, the Goldwater Institute designed solutions to protect families and taxpayers from fraudulent activity. Arizona lawmakers passed HB2458 in 2013, which gave the Arizona Department of Education additional authority to protect the accounts’ integrity. The bill directs the department to conduct regular audits and gives the agency the ability to create a fraud-reporting system online and over the phone. In addition, the bill allows the department to employ surety bonds with account holders. With a surety bond, parents buy a policy using account funds (typically around $25), and the department can use the policy fees to pay for any investigations into fraudulent activity or to recoup lost account funds if parents make ineligible purchases.

In 2013, lawmakers also increased the base funding amount for the accounts. SB1363 increased the base awards from approximately $3,800 to $5,300. For students with special needs, this amount will still be multiplied by the weight assigned to their diagnosis. In addition, SB1363 extended student eligibility to include incoming kindergarten students who meet the existing eligibility requirements (special-needs children, children attending to a “D” or “F”-rated public school, adopted children, and children in military families).

Arizona Empowerment Scholarship Account Legislative History

SB1553: Education, Arizona Empowerment Accounts	Passage: 2011 Summary: This bill authorized education savings accounts in Arizona. Special needs students were eligible to apply in the 2011-2012 school year. The accounts were funded using a specific source of funds at the Arizona Department of Education for students with special needs.
HB2622: School Rankings; Display; Time Period	Passage: 2012 Summary: This bill expanded student eligibility to include children attending schools that earned a “D” or “F” on the state report card, children in active-duty military families, and children adopted from the state foster care system. The bill also funded all accounts using the general fund, the primary source of Arizona state education funding.
HB2458 Empowerment Scholarship Accounts; Fraud Prevention	Passage: 2013 Summary: This bill required the Arizona Department of Education to conduct annual audits in addition to the quarterly reviews of the accounts. The bill also gave the department the authority to outsource auditing responsibilities and to create fraud-reporting resources such as a 1-800 phone number and a website dedicated to fraud reporting. The bill also gave the department the authority to create a surety bond arrangement with families to help recover any misspent funds.
SB1363: Empowerment Scholarship Accounts; Expansion; Funding	Passage: 2013 Summary: This bill expanded student eligibility to include incoming kindergarten students that meet the existing eligibility requirements for the savings accounts. The bill also adjusted the funding formula so that the basic amount of account awards was increased to approximately $5,300.

Education Savings Account Lawsuit

In what should come as no surprise to supporters of quality choices in education, the Arizona Education Association, a teachers’ union, and the Arizona School Boards Association (ASBA) filed suit shortly after Governor Brewer signed the accounts into law. In 2009, the union, school boards association, and the American Civil Liberties Union (ACLU) sued and took school vouchers away from Arizona children with special needs and children in the foster care system with a victory in Cain v. Horne. Teachers’ unions have also sued K-12 scholarship programs in states such as Florida, Ohio, and Wisconsin. Unions and other associations such as the ACLU are established opponents to student access to educational choices.

In the current lawsuit against education savings accounts, Niehaus v. Huppenthal, the teachers’ union and school boards association contend that the accounts violate state constitutional provisions prohibiting public money from being used for private or religious purposes. This reasoning is similar to opponents’ position in Cain v. Horne.

As described above, education savings accounts are distinctly different from vouchers because parents can use the accounts for various educational products and services. Parents are not compelled to use their funds for any specific service. The Goldwater Institute is defending the accounts alongside Arizona school superintendent John Huppenthal and the Institute for Justice. In January 2012, Maricopa County Superior Court Judge Maria Del Mar Verdin ruled that education savings accounts did not violate the state constitution. “The exercise of parental choice among education options makes the program constitutional,” Judge Del Mar Verdin wrote in her opinion.

The teachers’ union and ASBA appealed, and the Arizona Court of Appeals ruled in favor of the accounts on October 1, 2013. In a unanimous decision, Judge Jon W. Thompson wrote, “The specified object of the ESA is the beneficiary families, not private or sectarian schools. Parents can use the funds deposited in the empowerment account to customize an education that meets their children’s unique educational needs.” The union and school boards association are now asking the Arizona Supreme Court to take up the case.

Education Savings Account Research

In 2013, three studies provided the first research on Arizona’s accounts. In May, the Goldwater Institute conducted the first focus group study of families using education savings accounts. Eighteen parents participated. The purpose of the session was to learn more about how parents were using the accounts, what practices they found to be the most beneficial for their children, and what changes they thought would make the accounts more effective at helping their children.

Over the past 10 years, The School Choice Demonstration Project, based at the University of Arkansas, conducted similar focus groups of parents using school vouchers for their children in Milwaukee, Wisconsin, and Washington, DC. The focus groups found high levels of parent satisfaction and parent engagement with their children’s schooling.

Likewise, the Goldwater Institute’s focus group found that parents were satisfied with their choice to use an education savings account for their children. Ninety-four percent of participants were “very satisfied” with the accounts, and six percent were “somewhat satisfied.”

One focus group participant said, “I am, by and large, extremely happy with the fact that we have the account. I’m amazed that this is even possible, and every day I wake up and just pinch myself that this is a possibility.”

Parents reported that the Arizona Department of Education was the most helpful source of information about the accounts, but they also said that they found traditional public school officials and teachers were not informed about the accounts.

	Figure 4: What Were the Most Helpful Sources of Information When Choosing How to Use Your Education Savings Account?

	Source: Jonathan Butcher, “Dollars, Flexibility, and an Effective Education: Parent Voices on Arizona’s Education Savings Accounts,” Goldwater Institute Policy Report No. 263, October 3, 2013, p. 10, http://goldwaterinstitute.org/sites/default/files/GWI_Policy%20Report_ES.... No respondents selected the other available options of a school fair, family, friends, church, or doctors/physicians.

Parents report that public school officials had little or no information on the accounts:

• “The school officials knew nothing about the scholarship at all. They were asking me questions about the scholarship...and put me in a corner about the scholarship. They were not familiar with it at all.”

• “I was recently having my son’s [Multidisciplinary Evaluation Team report], and I was talking to the psychiatrist, and she had no idea what the scholarship was. She was asking questions about it. She thought it was really great. She thought it was great that he was able to use this scholarship. But she had never heard of it before.”

Another study using data on parent purchases found that parents are taking advantage of the accounts’ flexibility. Writing for The Friedman Foundation for Educational Choice, Lindsey M. Burke found that 34.5 percent of education savings account funds were used for multiple education services. Approximately 65.5 percent of funds were used only for a single educational option.

Burke found that more than $670,000 in account funds were unspent at the end of FY2012, and $338,000 were unspent in the first quarter of 2013. Burke writes, “This suggests families are saving and rolling over a significant portion of the ESA funds, in anticipation of either near-term or long-term future education-related expenses.” Note that education savings account students only use 90 percent of the state’s portion of funds set aside for them in the public school funding formula, resulting in significant taxpayer savings. A Goldwater Institute analysis estimates that for every 5,000 children using savings accounts, the state saves $12.3 million.

	Figure 5: Percentage of Empowerment Scholarship Account Funds Used for Single vs. Multiple Educational Options, September 2011 to March 2013

	Source: Lindsey M. Burke, “The Education Debit Card: What Arizona Parents Purchase with Education Savings Accounts,” The Friedman Foundation for Educational Choice, August 28, 2013, http://www.edchoice.org/Research/Reports/The-Education-Debit-Card--What-...

In a survey of savings account families conducted in 2013, Jonathan Butcher and Jason Bedrick found that 65 percent of parents reported using their child’s account for private school tuition. Twenty-seven percent of families did not spend any of their account funds on private school tuition. Similar to the two other studies conducted in 2013, the authors found that parents used the accounts for multiple purposes (Figure 6). According to the survey, 65 percent of parents used the accounts for private school tuition, 41 percent accessed education therapy, and more than one-third of respondents used the accounts for a tutor for their child.

	Figure 6: Different Uses of Education Savings Accounts

	Source: Jonathan Butcher and Jason Bedrick, “Schooling Satisfaction: Arizona Parents’ Opinions on Using Education Savings Accounts,” The Friedman Foundation for Educational Choice, October 10, 2013, p. 11.

The survey also found that some parents were spending their own funds on their child’s education in addition to education savings account monies: “Most parents reported using personal funds to pay for their children’s education in addition to education savings account funds. Though 24 percent reported not spending any additional funds, 29 percent of respondents spent $101–$500 in personal funds; 15 percent spent $501–$1,000; 12 percent spent $1,001–$2,500; 5 percent spent $2,501–$5,000; and 11 percent of respondents spent more than $5,000.”

Education Savings Account Legislation in Other States

In 2012 and 2013, lawmakers in Florida, Iowa, Montana, and Utah introduced legislation to create education savings accounts.

Montana legislators introduced two bills, HB357 and HB288. Under HB357, all Montana students, except virtual school students in the Montana school for the deaf and blind would be eligible to apply, while HB288 is specifically designed for special needs children.

Utah students in grades 9-12 would be eligible for accounts under HB123, introduced in 2012. Under this legislation, money in the accounts would earn interest, a distinction from Arizona’s law.

In Iowa, SF323 would have allowed private school students to access the accounts. The legislation also would have allowed parents to buy computer hardware once every three years, a provision not included in Arizona’s law. In the Arizona focus group, parent feedback indicated that the freedom to buy computers or tablet devices would help parents and students.

In Florida, HB1251 would have allowed all public school students to access accounts (with exceptions similar to the Montana bill cited earlier). Students in state-funded virtual schools and students already attending private schools using tax-credit scholarships would not be eligible. Families would be able to use the funds for private school tuition, online classes, personal tutors, and college savings plans, as well as pre-paid college tuition services. The bill also specified that a student could return to a public school at any time during the year. This is an important provision because the teachers’ union that is suing to stop Arizona’s program claims that parents forfeit their right to return to a public school.

The recent Arizona Court of Appeals’ decision says this complaint is not valid: “The ESA does not require a permanent or irrevocable forfeiture of the right to a free public education,” Judge Thompson writes. “All the ESA requires is that students not simultaneously enroll in a public school while receiving ESA funds.” Florida’s language states directly that parents have the right to return their child to a public school.

The Future of Education Savings Accounts

Over the past three years, Arizona lawmakers have made more children eligible for education savings accounts, enacted provisions to protect children and taxpayers from fraud, and increased the amount of each award. However, in order to give every child the chance at an excellent education, the accounts must be further expanded and revised in three areas:

• Eligibility: Every child should have access to education savings accounts, just as every child can attend a public school. The four-fifths of Arizona students still not eligible for the accounts must be included in future expansions of the law.

• Financial Transparency: Lawmakers gave the Arizona Department of Education more discretion to implement protections against fraudulent activities with the accounts, and the department must follow-through. Parents have unique flexibility with the accounts to buy different services to meet their children’s needs, and the department should implement surety bonds and other fraud-protection measures to make sure that account funds are being used for the benefit of students.

• Academic Transparency: Lawmakers and taxpayers should know how well students are performing using the accounts. Student achievement information is evidence of the accounts’ effectiveness, and this information can be used to demonstrate the accounts’ value, especially if financial fraud is discovered. That way, taxpayers know the accounts benefit students and the program will be protected in the process of prosecuting individuals that misuse the funds.

Conclusion

Lynn McMurray, the mother of education savings account students Alicia, Uriah, and Valerie, knows that her choices with her children’s education savings accounts will help to define their futures. “They need to survive in the world,” Lynn says. “They need to get jobs when they grow up and get back into the community.”

Holland Hines, who helped launch the Yahoo! Group for account families along with Kimber Cartwright, says, “We’re talking about taking care of these children for years if we don’t get them the proper education now.” Hundreds of Arizona families are taking advantage of the accounts with the same vision for the future.

Because education savings accounts give parents many different choices, lawmakers in Arizona and around the country should monitor both the spending flexibility and the academic outcomes to make sure children have access to the tools and services they need, and that they are, in fact, learning.

Some Goldwater Institute focus group respondents said they struggle to keep track of which expenses are eligible and which are not. “The expenditures that are covered can be very ambiguous,” said one participant. Another parent said, “I had no idea what would be covered or not, so I was just googling private schools.”

State lawmakers must keep track of parent feedback like this to make sure students have broad access to multiple services while also taking steps to prevent fraud. Education savings accounts have the potential to give every child the chance at a great education and will need careful legislative adjustment, a sustained legal defense, and more research on student outcomes in the coming years to live up to the potential.

Out of Sight: How Special Taxing Districts Circumvent Spending Limits and Decrease Accountability in Government

bwilson — Tue, 07 Jan 2014 15:51:58 +0000

The number of special districts has grown rapidly because special districts are not subject to many of the spending and debt limits municipal governments face. This has encouraged local governments to circumvent those limits by creating more special districts. Statistical analysis of states and cities across the nation shows that the share of local spending attributable to special districts correlates strongly with more overall per capita local government spending.

Special districts tend to have little accountability to voters. Special district elections are often timed for non-traditional periods, such as odd-numbered years or during the summer, when special interests can rally the troops to control the district’s creation and operation.

Moreover, multiple studies have shown that special districts provide services at a higher cost, and their services are no better or sometimes worse than those provided by municipal governments or the private sector.

To rein in this form of shadow government, the legislature should make special districts more accountable and limit the creation of special districts to necessary purposes. The caps placed on local borrowing and spending should be amended to apply to special districts as well. Additionally, more transparency measures should be implemented. Finally, special district tax and bond elections should take place alongside all other elections in November.

Special districts have long enjoyed loopholes that allow them to exist and operate outside normal limits on government power, resulting in “stackable Leviathans” that increase the tax burden. It is time to bring special districts into the light of day.

Introduction

In 2002, the Maricopa County Board of Supervisors in Arizona contemplated the future of the county-run Maricopa Medical Center hospital, which had become increasingly costly to operate. They would eventually spin the hospital and a few of the county’s health care programs into what is called a “special taxing district”—a layer of government that, as we’ll see in this study, is often less accountable to voters, less efficient than traditional county or city governments, and not subject to the same constitutional tax and expenditure caps that limit traditional local governments. Yet these districts are able to levy property taxes and spend money just like a county or city government.

The story of how the Maricopa hospital district came into existence is similar to hundreds of stories from hundreds of cities and counties across the nation over the past four decades. It’s also a story about how policymakers often use special districts to increase the size of government.

First, the Maricopa County Board of Supervisors convened a “citizen’s task force” to weigh the options. The task force was composed almost entirely of those who had a business interest or stake in the health care industry, as well as three board members of the Maricopa Integrated Healthcare System (MIHS), a system that included the Maricopa Medical Center.¹ They met periodically between December 2002 and March 2003, after which they released their final report.

>>Download the PDF Version of the story here<<

The task force report made clear that one of the main problems at the county hospital was not “excesses and inefficiencies” but, at least in part, “the effect of County expenditure limits on MIHS.”²

The task force report laid out the reform options and criteria they considered. In describing their criteria, the report noted that recommendations “with little or no prospect of legislative and public support [were] assiduously avoided.”³ Of the 10 options (which included both privatization and maintaining the status quo), four of them were to spin the health system off into a special district. Spending cuts at the hospital were dismissed early in the deliberations. The task force also dismissed the option of laying off some of the hospital’s 3,700 employees because it would “contribute to the state’s unemployment issues.”⁴

In making its final decision, the task force explicitly considered whether an option would be exempt from the spending limit.⁵ Task force members actually identified three statutes that outlined the special district arrangements under which they could do this with voter approval. A fourth statute required legislative action before Maricopa County could bring the creation of a new health services district to the voters, because the county exceeded the population limit in the statute. Any of these options would have allowed the county to move the hospital off of its constitutionally limited books and instead place it in a new district that would not have the same spending limits.

The task force finally recommended the type of special district that required legislative action, and the Board of Supervisors pursued that course of action. The Arizona Legislature expanded the eligibility of the statute the board wanted to use to create the special district. In August 2003, the board referred the creation of a new hospital district to the ballot.

The election materials the board distributed to voters stated that, “unlike law enforcement and criminal justice, the county is not required to operate a hospital.” But then they hastily noted that “closing the hospital would be devastating to the community,” even though doing so was far from the only option. For instance, the board’s own task force had listed other ideas, including the sale of the hospital to a private firm.

In a special election in November 2003, the voters passed the proposition that created the special hospital district. It was an off-year election, so voter turnout was light—around 13 percent, about a quarter of even-year November elections in the county—and the proposition won with 58 percent of the vote.⁶ That amounted to a total of 94,851 votes cast in favor of the proposition, a margin of victory of 28,501 votes. Or, to put it another way, roughly 2 percent of all registered voters in the county—fewer than one in 45 residents—created a special taxing district empowered to assess property taxes on every homeowner in the county.

Since 1994, Maricopa County had subsidized the medical center and its related health care programs to the tune of at least $178 million in total.⁷ Roughly $36 million of that subsidy came from the county general fund in 2003, and around $15.3 million had been authorized for fiscal year 2004. Moving the county health care system into the new district allowed it to spend roughly that amount of money on other programs.

This story is not unique, and neither are the consequences. Over the past 50 years, thousands of special districts have been created, many of them with the power to tax and spend. According to the Census Bureau, the number of special districts in the United States more than tripled between 1952 and 2012, burgeoning from 12,340 to 38,266. During that time, other types of local government increased by only 5 percent, from 37,061 to 38,910.

Meanwhile, the number of school districts actually declined dramatically due to a movement toward consolidation during this period, shrinking the number from 67,355 in 1952 to around 12,880 by 2012. Non-education special districts, on the other hand, account for over 40 percent of all state and local government entities today.

Spending by districts have been growing faster than traditional local government budgets and have become a major portion of government spending in many states. According to U.S. Census data, total real per capita local government spending (excluding education) grew 59 percent from 1977 to 2007. During that same period, real per capita special district spending more than doubled (118 percent). If special district spending were a line-item in an average local government’s ledger, it would be the third largest spending item, right behind welfare spending and education spending.

As we will see in this study, special districts have not only been the fastest growing form of government over the past two generations, they also have contributed heavily to the overall growth of local government spending and debt loads, all while operating at a lower standard of accountability than traditional local governments. This might be described not as a matter of Leviathan-like government growing out of bounds, but as a multitude of little Leviathans, all stacked on top of each other, both abetting and aiding the growth of the other. How this came to be and the institutional environment in which it occurred can reveal a great deal about the growth of government at the local level over the past 50 years. No strategy to rein in the spending appetites of state and local government would be complete without also tackling the growth of these multiple layers of government.

The Growth of Special Districts in the U.S.

Table 1 ranks the states based on the number of special districts per 100,000 people in a state. The number of special districts can vary by state based on characteristics unique to a state. For instance, rural states (like Wyoming and North Dakota) tend to have more special districts per capita than other states. Yet states with even a moderate level of special districts per capita can suffer from having a large number of governmental units overlapping particular geographic areas.

Table 1: Number of Special Districts (per 100,000 people), 2007

Source: Author’s calculations based on U.S. Census Bureau data.

Not all districts have the power to levy taxes—usually property taxes—but many do. (Other districts have only the power to raise money through fees.) The Census Bureau collects data on which districts have the specific ability to tax.⁹ The most recent published data show that the percentage of special districts with the power to tax can also vary greatly by state. Table 2 shows the percentage of special districts in each state with this power. Arizona leads the pack, with nearly every one of its special districts able to levy a tax of some sort.

Table 2: Percentage of Special Districts with Taxing Power

Source: Author’s calculations based on U.S. Census Bureau data.

The fact that many special districts have the power to tax is not simply an idle academic matter. As a practical matter, it can translate to wildly different property tax burdens for similarly situated homes. As reporter Michelle Lee of the Arizona Republic discovered, a home with the same property value as another home a mile away could pay dramatically more—sometimes up to 15 times more—in property tax add-ons as a result of special districts.¹⁰

Most special districts provide a specific service. In fact, “single purpose district” and “special taxing district” are usually synonymous in the literature and census descriptions. Special districts have had a reputation in the past as simply being a means of financing certain construction projects. That might have been true when special districts started to become common in states during the 1930s, but today that description isn’t accurate. Nationally, 60 percent of districts provide a program or service with their own employees, and 30 percent indirectly provide a program or service through contractual agreement with a private-sector company. Only about 22 percent construct public facilities.¹¹ So while some districts fit the stereotype, most of them function like service-specific government agencies. Table 3 shows the top 10 categories of services that special districts undertake. The most common is fire protection. The top 10 functions listed here account for around 70 percent of all service-providing special districts.

Table 3 : Special Districts by Top 10 Common Functions (percentage of total)

1. Fire protection 16.3

2. Water supply 9.7

3. Multi-function 9.1

4. Drainage 7.4

5. Soil and water conservation 7.1

6. Hospitals 6.2

7. Sewerage 5.7

8. Libraries 4.5

9. Irrigation 2.4

10. Highways 2.1

Source: Author’s calculations based on U.S. Census Bureau data.

Another attribute that people commonly associate with special districts is that they transcend normal political boundaries—meaning they straddle two counties or cities. A classic example is the irrigation district that follows the flow of a river. These types of districts are in the minority, however. Only about 10 percent of special districts cross the boundaries of two or more counties. As University of Chicago public policy professor Christopher Berry describes it, “For the most part, special districts are not fulfilling roles that existing governments are too geographically limited to fill. Between 1967 and 1992, in fact, the fastest-growing type of special district was one that shares exactly the same boundaries as an existing city or county. The multiplication of coterminous districts obviously cannot be explained by their greater territorial flexibility or the need for regional governance. Thus, while regional scope may be the rationale for some districts, it cannot be considered a general explanation for the growth in special districts.”¹²

Finally, a number of special districts exist mainly to serve as “conduits” for the financing of certain projects or services. The creation of the district would allow an expansion in the type of government-grade (i.e., tax-deductible on a taxpayer’s federal tax return) debt that can be issued. This is often the case with transportation-related districts, like road districts or air transportation districts. But all of these types of districts are in the clear minority when it comes to their share of total special districts in the United States today. In fact, only about 30 percent of special districts issue debt as a means of providing their services.

Where these types of districts may be especially attractive to municipal policymakers is in their ability to issue tax-free debt on behalf of a project that mainly enriches private interests. The Census Bureau collects data on what it describes as “public debt for private purposes.” The most recent data indicate that about 30 percent of all state and local public debt is of this sort. It’s easy to see that the federal subsidy to municipal debt through the tax code can indirectly subsidize these projects, often termed “community development” or “industrial development” projects. Indeed, a significant portion of special districts exist to finance projects of this sort.

Special district growth in Arizona

In Arizona, the number of special districts grew from 34 in 1952 to 326 in 2012. Most of that growth—more than 70 percent—occurred after 1980. The creation of special districts has grown even faster than the population. Figure 1 shows the trend in Arizona and measures it against population growth and the share of the population that resides in an urban area.

One argument that proponents of special districts offer is that large urban centers can support having general-purpose municipal governments provide a number of basic services—like a fire department or a sewer system—but rural areas can’t do so as easily. Hence, special districts need to be created to provide these services and capture the “economies of scale” that come with serving disparate populations over long distances. As we’ve seen already in Table 1, areas with low urbanization do tend to have higher rates of special district creation. However, lack of urbanization is not likely to be a driver of special district creation for most states.

Figure 1: Special Districts, Population, and Urbanization in Arizona

Source: Author’s calculations based on U.S. Census Bureau data.

As Figure 1 shows, both population growth and the scope of urbanization have little to do with the pattern of growth in special districts in Arizona over the past 30 years. While there does appear to be a link between the two prior to the 1980s, there is little connection since then. Arizona population has been largely centered around urban areas since the 1950s, so levels of urbanization haven’t grown much—or, to put it another way, the population hasn’t become any more rural over time, and it cannot therefore be the main reason for the growth of special districts.

When viewed in the overall context of special district growth across the nation, this isn’t surprising. As political scientist Kathryn Foster points out in her book on special districts, “Contrary to predictions, population growth rates have an insignificant influence on the number of districts in metropolitan areas. Fast-growing metropolitan areas are not more likely than slow-growing areas to have special-purpose governments.”¹³

Why Are There So Many Special Districts?

So what can explain the growth? Institutional factors and changing public policies seem to matter most.

Nationally, the first period of special district growth occurred during the New Deal era of the 1930s. Many federal programs that originated then offered states and localities money tied to the creation of special districts. Of those, many were related to capital projects. This has created a general perception that special districts are mainly created to facilitate construction projects—a perception that doesn’t fit most special taxing districts today.

The second era of special district growth occurred in the 1980s. Just prior to this second era, voters in many states approved debt, tax, and expenditure limitations on local governments. Some of these initiatives were more comprehensive than others. All told, 36 states have some kind of limit on tax revenue or expenditure growth, and many of those states have additional limits on property tax rates and assessments.¹⁴

The spending, tax, and debt limits placed on local governments seem to be a driving force in the creation of new special taxing districts because local governments use the districts as a way to skirt the spending limits. Some of these limits have been in place since as early as 1875, but most were put in place in the 20th century, with the majority emerging in the 1970s and 1980s.¹⁵ Those limits generally apply to cities and counties, but usually not to special districts. Therefore, government officials free up room in their expenditure-limited general fund budgets by spinning off functions into special districts.

Studies conducted since the 1970s have verified this phenomenon.¹⁶ A comprehensive 1990 study included nearly 300 suburban metropolitan statistical areas and adjusted for population growth, population concentrations, institutional factors (such as whether cities have “home rule” authority) as well as the presence of tax limitations, particularly on property taxes.¹⁷ Of all these factors, the one that came out with the highest level of statistical significance as a way of explaining the growth of special districts was the presence of tax limitations. The author, Illinois State University economist Michael Nelson, concluded that tax limits, particularly on property taxes, “spur special district formation as local officials and/or citizens see increased use of this unit of government as an effective means to circumvent this regulation.”¹⁸

An analysis from 2000 included not just tax and expenditure limits, but also debt limits that apply to local governments. The author, Barbara McCabe, currently of the University of Texas – San Antonio, concluded that her results “generally substantiate the idea that state rules influence the creation of special districts. State restrictions on general-purpose local governments tend to lead to the formation of special districts. State limits on cities’ and counties’ fiscal authority—in the form of either tax and expenditure limits (TELs) or debt limits—generally increase the likelihood that more special districts will appear in the state.”¹⁹

Another study focused on special districts in Illinois arrived at the same conclusion but in a different way. Illinois often draws the attention of researchers studying the growth of local governments, because that state has among the largest number of special districts in the country. In this case, the study looked at just over 100 Illinois counties and discovered that those without tax limits had vastly fewer special districts than those with them.²⁰ That is, counties that didn’t have tax limits to circumvent were less likely to spin off government functions into special districts. This result strengthens the case that special districts often serve the purpose of circumventing limits on government growth at the local level.

The limits that can be placed on county and city governments include general expenditure limits, overall property tax revenue limits, and overall property tax rate limits. According to data from the Advisory Council on Intergovernmental Relations, 25 states have at least one type of limit on lower levels of government, but presumably the limit does not also apply to special district governments. The average number of special districts per 100,000 people in the states without these limits is 12.9. For states in which there is at least one type of expenditure or property tax limit, the average is almost twice as high (25).²¹

This is not an argument against the need for tax and spending limits, however. Instead, it’s proof that current spending limits are too porous to truly restrain the growth of government, which is the reason to have them in the first place. As we’ll see next, the explosion in the number of special districts across the country is actually one of the drivers of local government growth and helps explain why some empirical studies have concluded that tax and expenditure limits are insufficient to limiting spending growth.

Special Districts Lead to Bigger Government

Substantial empirical evidence indicates that the proliferation of special districts leads to more government spending. The mechanism by which this works is highlighted by the Maricopa County hospital district example. To put the result simply, the more special (single-purpose) districts a locality has—and, for that matter, the larger the share of per capita government expenditures composed of special district spending—the larger the overall size of local government. This shouldn’t be surprising. It’s simple mathematics: When a special district is created to circumvent a local tax and spending limit, this new layer of “government” can spend money that is added to the total spending by traditional local governments. As a result of freeing up more budgetary resources in their general funds by creating special districts and off-loading government functions from the balance sheet, local governments can now spend even more than before.

And because special districts are not usually bound by spending caps, they have grown faster than local government budgets, even after adjusting for inflation and population growth. To put this in perspective, average real per capita local government spending (minus education and special district spending) grew 25 percent between 1992 and 2007. But the average special district budget grew, in real per capita terms, by almost twice that—46 percent.

Arizona special district budgets were particularly expansionary. Real per capita local government spending grew by 13 percent. Special district spending, on the other hand, grew at more than triple that rate, by 42 percent.

A recent study by Florida Gulf Coast University economist Dean Stansel showed that when there are more special districts per capita, overall local government spending increases.²² His study was based on the U.S. Census Bureau’s Census of Governments between 1962 and 1992 for 314 metropolitan areas. After adjusting for a number of demographic and state-specific factors, he discovered that the number of special districts per 100,000 residents had a statistically significant and positive relationship to the size of total per capita local government spending. (Positive, in this context, means the variables move in the same direction, growing together.)

A working paper from Rutgers economist Christopher Goodman used a similar methodology for 1982 to 2002, but went further by adding a variable that measured the share of local spending at the special district level and by separating school districts from the special district totals. He discovered that the results got even stronger. Not only was the number of special districts more strongly positively related to the size of local government spending but so was the share of special district spending. He concluded that this clearly indicated “single purpose governments are driving the increase in per capita total expenditures.”²³

That relationship, illustrated in Figure 2, shows there is some positive relationship between the share of special district spending and real per capita local government expenditures.

Figure 2: The Simple Relationship Between Special District Share of Spending and Real Per Capita Local Government Spending, 1992 - 2007

Empirical analysis can be done to see if this relationship holds up over time after being subjected to a number of control variables. The analysis conducted for this paper is a hybrid model based on the methodologies of the two studies cited above, but it uses the most recent data available from the Census of Governments.

The regression model, the full results and explanation of which appear in the appendix, includes the following variables. They were selected for inclusion since prior studies found a relationship between them and the growth of government:

Special district spending as a percentage of total local government expenditures²⁴
The share of local spending that is financed by “intergovernmental revenue,” such as general revenue shared by the state government and federal grants to local governments²⁵
Real per capita personal income²⁶
The percentage of families living below the poverty line²⁷
The percentage of the state’s population with 16 or more years of schooling²⁸
The percentage of population living in an urban area²⁹
The size of a state’s population³⁰

As expected, and in line with the other empirical studies on this subject, the share of special district spending was significantly and positively related to the size of real per capita local government spending. Essentially, each percentage-point increase in the size of a special district budget relative to the overall budget of all local governments translated into a $26 real per capita increase in the size of local government spending.³¹ This variable was the third-biggest driver of local government spending, behind overall growth of the population and the poverty level.

Special Districts = High Costs + Low Efficiency

Another reason that special districts drive up total local government spending is they tend to be more costly relative to alternative means of providing the same service. For example, some studies of special districts focus on fire protection districts and compare them with comparable fire departments run by a general municipal government. In each of these studies, the fire protection service provided by a special district was more expensive on a per capita basis than that provided by a city or county government. The result held even after adjusting for the costs of capital expenditure to build a firehouse and purchase fire trucks. The fire districts simply did not capture the “economies of scale” that their proponents often claimed was a beneficial feature of having them exist as special taxing district entities instead of as part of a general-purpose government.³²

Higher costs do not necessarily indicate a higher level of service, nor do they translate into more customer satisfaction. A 1997 survey in Michigan revealed that citizens there were more satisfied with fire services provided by general-purpose local governments than those provided by special fire districts. In fact, a vast majority of those surveyed preferred services generally to be provided by a city or county government instead of a special district. Only 3 percent felt differently.33

Low efficiency levels and poor quality of service are a recurring, robust, and significant pattern in the studies that have been published, notes University of Chicago political science professor Christopher Berry. He concludes that the weight of the evidence suggests that as a general rule “special-function districts are less efficient and provide no better quality than general-purpose governments.”³⁴

Costs of special water districts are another good example. A study of 26 rural Nevada water districts discovered that utilities offered by the special districts were significantly less efficient than those operated by city or county governments. The municipality-operated water utilities ran at 90 percent efficiency, just above the average level of 88 percent. The water district utilities operated at just 85 percent efficiency. Not surprisingly, neither type of public utility was more efficient than the utilities provided by private firms in that state (which were 91.3 percent efficient).³⁵

There is a substantial amount of research on another type of special district that may seem mundane: park districts. However, these districts are no less prone to the influences that create higher costs but provide lower levels of service. A study of park districts in 10 Midwestern states found that, in per capita terms, they spent nearly three times the amount on average than was spent by parks and recreation departments of general purpose governments.³⁶ Yet, as Berry describes it, “the average park district provides, on a per capita basis, fewer park facilities, fewer recreational programs, and fewer acres of parkland than the average parks and recreation department.”³⁷

Library districts are another example of a high-cost, single-purpose government with bloated overhead and less desirable services than those offered by general-purpose governments. Berry and his co-author, Jacob Gerson of the University of Chicago Law School, analyzed more than 100,000 library districts across the nation. They concluded, “Library districts do spend significantly more than other types of libraries. But library districts have fewer books. Districts have a comparable number of employees, although their employees are less likely to be actual librarians, relative to libraries operated by general-purpose governments.”³⁸ Using the number of visits as a proxy for demand of the libraries provided by these special districts, the authors conclude that, despite spending more, “library districts do not attract more visitors or have higher circulation than municipally run libraries.” So spending more does not produce a larger book collection, nor does it reflect higher utilization—it’s a classic case of government inefficiency. In fact, library districts spend about 10 percent more per patron visit than comparable municipal libraries.³⁹

One potential explanation for the cost differentials in these studies is that these special districts may simply be more likely to have high capital costs for buildings and the like. After all, special districts have long been thought of as being primarily involved with capital projects or at least providing services that require higher capital costs and correspondingly higher debt levels to finance them. Yet analysis of the Census Bureau’s Census of Governments suggests this reputation is unwarranted. Studies that have used this data to pin down which categories constitute the lion’s share of special district spending conclude that the category of “current spending”—in other words, spending on providing services—is much larger than capital spending. The average per capita expenditure on current spending was $1,846 in the 2002 Census of Governments, while average capital spending was less than 15 percent of that ($267 per capita).⁴⁰ It’s difficult to argue that these levels of capital costs are driving the observed phenomenon of increasingly costly special district services.

What likely explains these results are instead political and institutional realities that sabotage or discourage accountability, transparency, and pressure to be more efficient, such as having to compete with other agencies for limited general funds in the context of a traditional budget-making process by a traditionally elected city council or county council. That’s the explanation to which we turn next.

Special Districts Are Harder for Taxpayers to Monitor and Heavily Influenced by Special Interests

Just as there is an institutional explanation for the proliferation of special districts—porous tax and expenditure limits—there is a simple, institutional explanation for the increased costs that researchers uncover time and time again with respect to special district operations. The answer is that multiple levels of government, all of which have the power to tax the same pool of property and people, can be harder for taxpayers to consistently monitor than one or two general-purpose governments, such as a city or county. As a consequence, the special districts can be heavily influenced by special interests, like labor unions, that can dominate low-turnout elections and that frequently have the ear of the district boards, with little countervailing pushback or feedback from voters.

Accountability becomes further reduced when a special district’s decision makers are appointed instead of elected. And in the cases when the policymakers are elected or their decisions require voter approval, deliberate disenfranchisement often follows in the form of elections that occur in off years or at unusual times of the year.

The idea that special district governments are generally less accountable has been a theme in the published analysis since at least the 1950s, shortly after they began to multiply quickly in the wake of New Deal programs that encouraged their creation with the promise of federal money. J.C. Bollens, one of the earliest political scientists to study special districts, noted in his seminal work on this topic in 1957, that the proliferation of these districts can create “confusion, misunderstanding, and indifference.” He noted the tendency for special districts to be headed by those who were appointed, not elected, which made them “at best, twice removed from the voters.” He even went so far to describe the decision-making process in special districts as a “multi-ring circus.”⁴¹

Now, more than 55 years later, we have substantial empirical evidence that these insights were basically correct. Data show that more overlapping governments makes it harder for voters and taxpayers to monitor the activities of those governments. Thus, the tax base on which all of these overlapping governments feed is a “common pool” from which small amounts are extracted from less-suspecting (or less active) taxpayers by more engaged and better-organized interest groups.

One good way to test whether an increasing number of districts leads to higher levels of spending and taxation comes from Charles Berry’s seminal and comprehensive analysis based on an “overlap index” he created using the Census Bureau’s Census of Governments data. For all counties in the United States, he measured the number of jurisdictions that overlap the average city within a county. He then conducted statistical analysis to determine whether this overlap had any influence on the tax burden within the county.

His analysis showed that more overlap leads to higher spending and tax burdens, even after adjusting for “inherent attributes of counties” that might make them prone to higher government spending, such as demographics and location. “To put the result in perspective,” he writes, “increasing from a relatively low level of overlap (the 25th percentile) to a relatively high level (the 75th percentile) results in an increase of $130 in locally raised [per capita] revenue,” which Berry notes is equivalent to an 11 percent increase above the average.⁴² This is entirely consistent with the behavior you would expect from a government that is less accountable, more opaque, and which taxpayers have less cognizance of than a general-purpose government.

Advocates of special districts often argue that those districts are undertaking roles that the municipal government can’t or shouldn’t, and therefore the tax burdens need to be higher to support the additional activities. Yet the published analysis indicates that’s not true either. As Berry writes, the results that he and others have generated over the years “strongly suggest that the effect of jurisdictional overlap on local budgets is not simply an artifact of changes in local functional performance, but rather reflects increased spending on the same functions that would otherwise be provided by general-purpose governments.”⁴³

All of these results are consistent with the theory that special districts are created as a means to circumvent spending and tax limits. They also imply that the subsequent growth in government taxation and spending is the result of institutional factors that put average taxpayers and voters at a severe disadvantage relative to the interests that have a stake in the creation and operation of a special district.

Voter turnout and non-traditional elections

One factor that makes special districts less accountable to voters is the fact that they generally have low voter turnouts in the elections that create them or that pertain to their operations, such as levying a tax or issuing debt. The stories that researchers have collected from across the country make the story of the creation of the Maricopa County hospital district look like the norm instead of the exception.

An extensive 2007 study of special district elections in Nassau County, New York, discovered that voter turnout was far lower than that of general elections. The 2002 gubernatorial election turnout was 44 percent in that county. But the turnout in the succeeding special district election ranged from 2 percent to 14 percent.⁴⁴ Other studies, although not as comprehensive, find similar examples. One study of Michigan school board elections found that turnout among registered voters averaged 7.8 percent. Three-quarters of the districts had turnout of less than 10 percent.⁴⁵ Another example comes from a Texas utility district in which a $14 million bond was issued with the turnout of only 32 voters.⁴⁶

Some of these examples may seem like outliers, but low voter turnout in special district elections is commonly observed by scholars who have studied the issue. There is even general consensus regarding one of the main reasons for low turnout: these elections usually occur in off-years or at unusual times of the year. The Nassau County Executive office, which conducted the study of its special district elections, found that those elections were held on 24 different days of the year. It also found that there was at least one special district election in 11 of the 12 months of the year. Yet not a single one of the special district elections was held on the same day as the general election in November. The report concluded: “The scattered nature of the special district elections, and the extreme difficulty involved in obtaining some of their election dates, place an undue burden on voters. Even the most conscientious of Nassau residents would find it difficult to vote in all of the elections that concern them.”⁴⁷ Additionally, the Michigan school elections studied in the examples cited here were all in June.

In California, the Little Hoover Commission found that turnout was significantly lower in special district elections than the turnout for other types of local government elections throughout the state largely because of non-traditional election schedules. The report also outlined the outcome of an intriguing natural experiment: Sacramento County required its special districts to hold elections in even-numbered years. This simple change increased voter turnout to 45 percent of registered voters from where it was initially at 17 percent. A 1994 study of school districts in California’s Riverside County found a similar pattern when it changed elections to even-numbered years.⁴⁸

A study of Cook County, Illinois, by the University of Chicago’s Christopher Barry found that voter turnout in special district elections was “almost universally lower than in general-purpose elections.” The special district elections—for school, library, park, fire, and community colleges—occurred in April of odd-numbered years. Turnout for those averaged 21 percent. By comparison, the turnout for the November 2004 election was nearly 50 percent of registered voters. In addition, the overlap of the many jurisdictions meant there was an overwhelming number of elections for voters to keep track of. Barry estimated that “a typical resident of Cook County is represented by 70 different elected officials and would have to go to the polls on six different dates to vote for all of them.”⁴⁹

For many local policymakers, low voter turnout is a feature, not a bug. When an election is in the middle of the summer in Phoenix, for instance, when vastly fewer people are around—and the election date is chosen purposely by local officials because of that fact—it is much more likely that these elections don’t accurately represent the normal preferences of the general public. Those most motivated to influence the election have the wherewithal, resources, and inside information about these contests that may seem like a low-stakes contest for the average voter. In other words, while most general elections are about voters choosing elected officials, most special district elections that are intentionally placed on unusual dates are usually more about the elected officials choosing which voters will participate.

That was the conclusion of a 1997 study that compared all school and municipal bond elections in Oklahoma from 1988 through 1992, all school and municipal bond elections in Ohio from 1963 to 1987, and a subset of all school bond elections held in 20 states during 1994. The study concluded that local officials systematically avoid holding bond elections at the same time as the general election and that bond referenda are more likely to be approved when there is comparatively lower voter turnout.⁵⁰

Control over the election can also sometimes extend to the locations in which those elections will take place. A fire district in Colorado was roundly criticized by the media there for a 2006 referendum on a $43 million bond issue and tax increase in May of that year. All 16 polling stations were at fire stations. As a Rocky Mountain News editorial writer mused, “If you’re opposed, all you need is the courage to show up at any given station and ask a burly fireman where you go to vote against the tax increase.”⁵¹

A vivid example of how those with a greater personal stake in the outcome of a special district election are more likely to vote comes from the research of Terry Moe at Stanford University. He examined 14 school district elections in California between 1997 and 1999. For each of these, he also gathered data on the names and ZIP codes of school district employees and was able to match these names to county voter files. This allowed him to track each employee’s voting history. During his research, he found that many teachers lived in a district different from the one that employed them. As might be expected, the teachers who lived in the same districts in which they were employed had a much higher stake in those school district elections than those who didn’t live in the districts that employed them—and that’s exactly what Moe found. The voting turnout for teachers who lived in a district different than the one where they were employed was 18 percent. But the turnout for a teacher who worked in the same district in which she lived was over twice as high, at 46 percent.⁵²

It’s easy enough to see the intangible costs of often-blatant attempts to disenfranchise all voters except for those who have a strong stake in the outcome. As the Advisory Council on Intergovernmental Relations concluded in its 1987 report that a single special district in a geographic area might be held accountable relatively easily, “multiplying the number of single-function units increases the costs of accountability overall.” There are examples, however, of explicit costs of government being higher as a direct result of voter disenfranchisement. The University of Chicago’s Christopher Berry and Jacob Gersen found that school districts that held their elections in odd-numbered years negotiated significantly more generous contracts with teachers than did districts that held their elections in even-numbered years coincident with state and national elections. “Comparing teachers at an equal salary ‘step,’” the authors conclude, “those working in districts with odd-year elections earn roughly $2,000 (or about 4 percent) more than those working in districts with even-year elections. Moreover, we find evident that turnout goes up and salaries go down within a district when its election date is changed from odd to even years.”⁵³

Recommendations

The proliferation of multiple layers of government that can speed the growth of local government spending, abetted by a lack of transparency and captured by particular political interest groups, is a trend that must be stopped. Local policymakers are not likely to unilaterally undertake such reforms, so it is incumbent upon state legislators to put into place taxpayer safeguards that not only make these layers of government more accountable, but also over time reduce their number.

Some of the proposals outlined here can be undertaken incrementally. Some require federal action. But they all point to a new institutional framework that aligns the interests of taxpayers and government officials in a way that is absent in the current policy environment.

1.) Make tax and spending limits apply to all forms of local government, including special districts. If a state has a tax and expenditure limitation on localities, then special districts should be brought under this limit as well. This will require the services provided by the special district to compete with other general fund budget services in a way they don’t have to now. This could also facilitate privatization of some services. While it’s important to make sure that the districts included in the calculation are those special districts that were created with the direct approval of the relevant local government—not one mandated by the state or federal government—it’s likely that most special districts will be included.

State policymakers can require all new special districts that are created within the boundaries of a county or city to be counted as counting toward the applicable constitutional or statutory spending limit if one exits.

Alternatively, state policymakers can forbid localities from creating new special districts until the total aggregate tax burden or spending of all local governments combined, including special districts, equals no more than the relevant tax or expenditure limit. A transition period with a deadline can be allowed to avoid disruption in certain services. But over time, localities should be forced to deal comprehensively with the scattered array of special districts simultaneously operating within a city or county boundary.

Localities could also be given the power, if they don’t currently have it, to review and terminate special districts that no longer serve a useful purpose or are shown to be less efficient than the alternatives. This could occur via a vote by a city council or county board to dissolve a special district. It could also mean that special districts, as a general rule, are subject to “sunset” provisions the way other state agencies that provide a service are. Thus, the burden of proof to keep the special district operating after the sunset date is on the district itself. To that end, state legislators could also require that localities routinely perform a cost-benefit analysis of existing special districts to make sure they are efficiently providing the services they were created to provide, and honestly appraise whether those services could more effectively be provided by the general-purpose county or city government, or even by the private sector.

2.) Make special districts more transparent. Special districts have many of the powers that traditional local governments have. Therefore, they should be required to meet the same standards of transparency as those governments as well. Debt levels, spending levels, and revenue collection data should all be reported to either a relevant county or state agency for inclusion in an annual report or searchable database available to the public.

Frequent and regular audits by an objective auditor, such as the state auditor general office, should be a common practice. State legislators could require these by law. In addition, the creation of new special districts could be strictly forbidden in a county or city until all of the existing and functional special districts operating within their territory have an audit no older than five years. If a district audit uncovers a need for reform of a specific district’s operations such as their accounting systems and practices, a report showing substantial progress on these reforms needs to be furnished to and verified by the state auditor’s office before a special district can be created.

A “boundary transparency” database could also be constructed and administered by the state government that would make it easy for voters to enter their address and see how many special districts overlap their property. It could include the name of the district, the purpose of the district, and the tax rate applied. Integration with existing budget transparency databases could also provide taxpayers with links to spending and debt data.

3.) Make special districts more accountable. A number of policy reforms can be enacted to make special districts more accountable. To minimize the incentive of a special district to embark on a project that enriches a specific private interest or special political interest, policymakers should enact a requirement that only elected boards may issue government-grade debt. This would likely reduce the attractiveness to use a special district mainly as a mechanism to finance a project that may not pass muster with voters.

Special districts have a long way to go to repair the disenfranchisement they have practiced for decades. To both discourage the scheduling of election dates that are engineered to ensure low voter turnout, and to help policymakers determine which special districts are the most useful and important to voters, a “voter turnout trigger” can be enacted.⁵⁴ If voter turnout falls below a specific level for two subsequent elections, the special district would be dissolved. This proposal could also be a complement to the aforementioned power given to local governments (county and/or city) or the state to dissolve special districts that have outlived their usefulness, are inefficient, or even corrupt.

Finally, and perhaps most important, special districts should be required to consolidate their elections with all other traditional government elections in November. This will increase voter turnout and also diminish the likelihood that special districts will be captured by political interests that might be arrayed against the best interests of voters or taxpayers.

Conclusion

Getting a handle on special districts is the missing piece of the state tax revolution that began in the 1970s. That period of history gave us many state tax and expenditure limits that were meant to finally put a leash on the spending appetites of Leviathan at the state level. Special districts have long enjoyed loopholes that allow them to exist and operate outside these limits. Policymakers should look toward the goal of eliminating those loopholes as a means of finally and effectively restraining the growth of government at the local level.

Appendix

The empirical estimates cited in this paper come from an ordinary least squares (OLS) regression model designed to gauge the influence of a number of demographic and policy variables on the change in real per capita local government expenditures. The model is cross-sectional and uses data from 48 states for the period of 1992-2007. It excludes Alaska and Hawaii, as do many fiscal studies of this sort, because these states are outliers in the data due to their unique geographic characteristics. In the case of Alaska, the singular fiscal reality that most of its state and local revenue is derived from oil royalties rather than taxes also makes it incomparable with other states. Heteroskedasticity has been adjusted for by using Eicker-White standard errors. The results are below.

References

1. The task force’s final report includes the names of the members as well as the final recommendations: http://www.maricopa.gov/agendas/pdf/taskforcerpt.pdf.

2. Ibid, 6.

3. Ibid, 3.

4. Ibid, 16.

5. Ibid., appendix, Exhibit 7.

6. Author’s calculations based on data from the Maricopa County Recorder/Election Office, http://recorder.maricopa.gov/electionresults.

7. State of Arizona, Office of the Auditor General, Financial Statement Audit of the Maricopa County Medical Center, Fiscal Year 2003, January 9, 2004, http://www.auditorgen.state.az.us/Reports/Counties/Maricopa/Financial_Au....

8. The Census Bureau, through its five-year Census of Governments, continues to collect this data. However, they have not published the data since 1992, so that year’s is the most recent available.

9. Michelle Ye Hee Lee, “Taxation Vexation: Special districts often lead to wildly disparate tax bills among neighbors,” Arizona Republic, June 19, 2003.

10. U.S. Census Bureau data cited in Christopher R. Berry, Imperfect Union: Representation and Taxation in Multilevel Governments (New York: Cambridge University Press, 2009), 35.

11. Berry, 41-42.

12. Kathryn Foster, The Political Economy of Special Purpose Governments (Washington, D.C.: Georgetown University Press, 1997), 133.

13. Michael Bell, David Brunori, Joseph Cordes, and Bing Yuan, “Tax and Expenditure Limitations and Their Effects on Public Finance” (working paper, George Washington University, August 2007) 10-12, http://www.gwu.edu/~gwipp/lincoln/Yuan_Cordes_Brunori_Bell.pdf.

14. Advisory Commission on Intergovernmental Relations, “Tax and Expenditure Limits on Local Governments,” March 1995, http://www.library.unt.edu/gpo/acir/Reports/information/M-194.pdf.

15. For examples and literature reviews, see Susan A. MacManus, “Special District Governments: A Note on Their Use as Property Tax Relief Mechanisms,” Journal of Politics, vol. 43 (1981): 438-444; and Foster (1997).

16. Michael A. Nelson, “Decentralization of the Subnational Public Sector: An Empirical Analysis of the Determinants of Local Government Structure in Metropolitan Areas in the U.S.,” Southern Economic Journal 57, no. 2 (October 1990): 443-457.

17. Ibid, 456.

18. Barbara Coyle McCabe, “Special-District Formation among the States,” State and Local Government Review 32, no. 2 (Spring 2000): 121-131.

19. David L. Chicoine and Norman Walzer, Governmental Structure and Local Public Finance (Boston: Oelgeschlager, Gunn & Hain, 1986).

20. Author’s calculations based on data from the Census Bureau and Advisory Commission on Intergovernmental Relations, “Tax and Expenditure Limits on Intergovernmental Relations,” March 1995. The averages exclude North Dakota and Wyoming since they are clearly outliers in that they have an unusually high number of special districts per 100,000, and most of their special district growth can be explained by the fact that they are generally very rural states.

21. Dean Stansel, “Interjurisdictional Competition and Local Government Spending in U.S. Metropolitan Areas,” Public Finance Review 34, no. 2 (March 2006): 173-194.

22. Christopher B. Goodman, “Local Government Fragmentation & the Local Public Sector: A Panel Data Analysis,” November 2012, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2170783.

23. U.S. Census Bureau, Census of Governments, various years.

24. Ibid.

25. U.S. Bureau of Economic Analysis, U.S. Department of Commerce, various years.

26. U.S. Census Bureau, various years.

27. Ibid.

28. Ibid.

29. Ibid.

30. This relationship was significant at the 99 percent level of confidence. The regression model outlined here explains 55 percent of the phenomenon observed. Or, for those familiar with statistics, the R-squared was 0.55. See the appendix for details.

31. See studies cited in Foster, Table 3-2, p. 74.

32. Lyke Thompson, “Citizen Attitudes about Service Delivery Modes,” Journal of Urban Affairs 19, no. 3 (1997): 291-302.

33. Berry, 146.

34. Arunava Bhattacharyya, Thomas R. Harris, Rangesan Narayanan, and Kambiz Raffiee, “Technical Efficiency of Rural Water Utilities,” Journal of Agriculture and Resource Economics 20, no. 2 (1995): 373-391, cited in Berry (2009).

35. David Emanuelson, “A Comparative Analysis of Illinois, Ohio, Colorado and South Dakota Park Districts and Parks and Recreation Departments to Wisconsin, Iowa, Missouri, Kansas, Indiana, and Michigan Parks and Recreation Departments,” paper presented at the annual meeting of the Midwest Political Science Association, April 2008, cited in Berry (2009).

36. Berry, 146.

37. Ibid., 145.

38. Ibid.

39. Ibid., 113.

40. J.C. Bollens, “Special District Governments in the United States,” (Berkeley: University of California Press, 1957), 253.

41. Berry, 181.

42. Berry, 103-104.

43. Thomas R. Suozzi, “Special District Election Date Study: A Crazy Quilt,” Nassau County Executive, 2007, cited in Berry, 64.

44. Debbi Weimer, “Data Brief 5,” Education Policy Center, Michigan State University, 2001, cited in Berry, 65.

45. Berry, 65.

46. Suozzi, cited in Berry, 64.

47. Cited in Berry, 65.

48. Berry, 65.

49. Stephanie Dunne, W. Robert Reed, and James Wilbanks, “Endogenizing the Median Voter: Public choice goes to school,” Public Choice 93 (1997): 99-118.

50. Cited in Berry, 68.

51. Terry Moe, “Political Control and the Power of the Agent,” Journal of Law, Economics, and Organization 22, no. 1 (2006): 1-29.

52. Berry, 68.

53. For more information, see Nick Dranias, “A New Charter for America’s Cities,” Goldwater Institute, March 2009, http://goldwaterinstitute.org/article/new-charter-american-cities-10-rig....

Special taxing districts are all the rage. They are now the fastest growing form of government, even though they often operate out of sight and out of mind for most voters and taxpayers. These often unnoticed local governments have the power to tax and spend like municipalities and are set up to provide a specific service. They have contributed heavily to the overall growth of local government spending and debt loads, all while operating virtually behind the scenes and at a lower standard of accountability than traditional local governments. Many taxpayers don’t even realize they are paying taxes to these government-like entities. The number of special districts has grown rapidly because special districts are not subject to many of the spending and debt limits municipal governments face. This has encouraged local governments to circumvent those limits by creating more special districts. Statistical analysis of states and cities across the nation shows that the share of local spending attributable to special districts correlates strongly with more overall per capita local government spending. Thursday, January 9, 2014 - 08:22Special Taxing DistrictsAre local governments spending too much?Tax Reform Policy ReportYes Copy of New chart 1 special districts and population 1 3 14.pdf SpecialDistrictsPaperOnline.pdfBy TopicsStephen Slivinskifalse

Gaming the System: Districts Make a Dash for Cash in Charter Schools

bwilson — Mon, 09 Dec 2013 18:46:09 +0000

This year, 20 Arizona school districts gained access to millions of dollars more in state taxpayer funds than their usual education appropriation—most in a matter of a couple of months—by opening 59 charter schools.


	Every Gowan Science Academy lesson involves science, technology, engineering and math, including the first graders’ fall assignment (pictured above) to design and test catapults.

When the 2014-15 academic year begins, these schools will start receiving a combined $33 million in additional state funding annually. Those figures do not account for the other 12 district-run charter schools that had opened prior to this year.

Public districts receive on average $8,992 per student from the state, which is $1,532 more per student than typical charter schools, according to a comparison the Arizona Joint Legislative Budget Committee released in September. This is largely because public districts receive state funding for transportation and capital funds, while charter schools do not.

A state budget analysis and finance documents show that the district-run charter schools receive an estimated $1,000 more per student than traditional public schools.

Public school districts in Arizona have several funding advantages over charter schools – primarily, local property tax collected from district bond issues, and budget and capital overrides. Arizona allows public districts that have opened charter schools to continue collecting those taxes, which widens the funding gap.

Districts that open a charter school sacrifice a few funding opportunities, though the additional assistance they collect for the charter more than offsets those losses.

“They are giving up what was ‘capital outlay revenue limit,’ and they’re giving up ‘soft capital’ and their kids no longer qualify for transportation assistance,” said Lyle Friesen, the Arizona Department of Education’s finance director.

The districts also can’t apply for state funds from the School Facilities Board to pay for repairs or construction at any of their charter schools. The Arizona Attorney General’s Office in the summer also determined that districts that have received “growth” dollars to help them pay for rapid influxes of students moving into their schools can no longer receive the growth funds once they switch the traditional campuses to charter schools.

In all, Friesen estimates a district school sacrifices $700 to $800 per student primarily in transportation and capital funds to switch to a charter. In spite of these losses, the new district-run charter school ultimately will see an annual budget increase of an estimated $1,000 to $1,100 per student in additional assistance. In an elementary school of 400 students, that represents an annual budget increase of up to $440,000, on top of their base level of funding, which the state calculates through a complex per-pupil formula.

Charter schools also receive a base level of funding, and then rely on the additional assistance to cover capital costs – whether that entails building rental, purchase or even payments for new construction.

“The school finance system is broken, and this shows that it’s broken,” said Eileen Sigmund, president and CEO of the Arizona Charter Schools Association.

Administrators for districts that turned traditional public schools into new charters acknowledge the transition’s obvious effect on their school budgets. However, several of them also have told their communities in online publications and videos that the transition has “no impact” on their school operations.

Such statements contradict the purpose of Arizona’s charter school law, A.R.S. 15-181, to increase school options for students that could help them excel academically.

“We need greater oversight and more eyes on the management of a district when it decides to convert a dozen of their schools at a time to charter schools,” said Sen. Kimberly Yee, R-Phoenix. “The public needs to ask: Is this a real charter school change or just the same old school that now receives $1,000 more per student because it renamed itself a charter?”

State Board of Education executive director Vince Yanez said the law, A.R.S. 15-183, does not require any review for a district-proposed charter school except by the district’s local governing board.

Joint Legislative Budget Committee analysts regard the surge in district-owned charter schools as an unforeseen tsunami sweeping into the taxpayer-supported state general fund. They warn that costs will continue to swell far into the tens of millions of dollars as more districts switch existing campuses to charter schools or open new charters.

>>> Read the PDF version of this story

District superintendents defend the trend to open charter schools as permissible by state law. Several cite budget cuts and a sharp decline in state funding for the agency in charge of public school construction, the Arizona School Facilities Board.

“School districts have seen a very significant reduction in state funding,” said Vail Unified School District superintendent Calvin Baker.

The district, roughly 25 miles southeast of Tucson, now has seven charter schools and a maintenance and operations budget of more than $60 million.

A statewide school audit released in March 2013 showed a dip in school operational spending from fiscal 2009 to fiscal 2012. Even so, overall operational spending actually increased 39 percent from a statewide average of $5,374 per student in fiscal 2001 to $7,475 per student in fiscal 2012, auditors wrote.

The Auditor General’s office also noted that despite the overall increase, districts spent 54.7 percent of their funds on classroom expenses, the lowest level recorded since 2000, when the office started tracking school spending.

State funding for new school construction is at a standstill. Arizona Joint Legislative Budget Committee records show 2008 was the last fiscal year on record when the state provided the Arizona School Facilities Board with money for new buildings.

Additional assistance

Most districts that converted or opened new charter schools for the 2013-14 school year are in the Phoenix metropolitan area, from Buckeye Union High School District in the west Valley to Higley Unified School District in the East Valley, state education records show. A few of the other remaining districts are in rural or border cities such as Cottonwood, Sierra Vista, and Yuma.

The bulk of the budget increase for the district-run charters comes to them in the form of additional assistance. The state bases the amount of additional assistance a school district can receive on the number of students attending their charter schools.


State Board of Education president Tom Tyree said Crane district’s new Gowan Science Academy is an example of a genuine charter because it is a science-focused school where students, including these first graders, must build and design projects that test their science, math, reading and writing skills.

For the first year of a district-run charter school, the state gives additional assistance to the schools for new students who are attending class at the school for the first time, which in the case of an elementary school would include kindergarten students and any other students who weren’t previously enrolled. In the second year of operation and for every year afterward, the state provides additional assistance – about $1,000 to $1,100 per student – for every child in the school, which for some schools adds up to millions of dollars in additional funding per year.

There is one catch. If a district governing board chooses to revert a charter into a traditional public school, the district must return every penny of the additional assistance it received back to the state. State officials, however, cannot think of a single school that has reverted.

Toltec Elementary School District in Arizona City will receive the smallest amount of additional assistance among district-run charter operators: at least $31,320 for its new charter, Cambridge Preparatory Academy, which is comprised of two schools. The academy’s additional assistance will grow to an estimated $104,400 annually in the 2014-15 academic year, state education finance records show.

Paradise Valley Unified School District will receive the largest amount of any district to date for converting 11 of its schools, with $1.5 million in additional assistance for the current school year, increasing to $7.2 million annually in 2014-15, according to district officials.

Conversions have represented 8 percent to 10 percent of all charter schools in the nation in the past four academic years, the National Alliance for Public Charter Schools found. In the 2011-12 academic year, 591 schools – about 9.8 percent of the 5,996 charter schools in the country - were conversions.

Georgia’s trend closely resembles Arizona’s: Traditional public schools in Georgia can obtain $100 per student in additional funding with a charter conversion, said Andrew Lewis, executive vice president of the Georgia Charter Schools Association.

Thirty of Georgia’s 108 charter schools in the 2012-13 academic year were conversions, according to the National Alliance for Public Charter Schools.

Lewis said he has noticed a political shift that will likely drive an increase in conversions. School districts that used to oppose charter schools “are now saying, ‘We love charter schools so long as they look like this and operate like this and are under the management and control of the local board,’” Lewis said. “It’s a little bit more of a clever way to oppose yet benefit from [chartering].”

Pattern of conversion

Seven of the district-run charters that opened in Arizona this year were entirely new schools or academies, Arizona Department of Education records show. The other 52 were former public schools turned into charters.

Arizona law, A.R.S. 15-181 defines charter schools as “public schools that serve as alternatives to traditional public schools” and that can improve student achievement.

The 52 converted campuses varied in performance on the state’s annual A-F Letter Grades for the 2012-13 academic year, when they were traditional public schools. Twenty-two of them received As (the top rating), 20 received Bs, nine were given Cs, and one - Arroyo Middle School in the Phoenix-area Washington Elementary School District – received a D.

Improving academic achievement should be a key objective for any new charter school, especially given Arizona students’ below-average performance on national benchmark assessments, said Jonathan Butcher, Goldwater Institute education director.

Gadsden Preparatory Academy fits the mold for creating school choice, State Board of Education president Thomas Tyree said.

Starting next school year, Gadsden students who attend the new academy could “complete their high school diploma and their community college associate degree simultaneously,” according to the elementary district’s plan for high school expansion. Arizona Western College is coordinating with the district to develop college-credit courses.

Tyree said this academy ensures Gadsden students can access college-level and high school opportunities in their hometown of San Luis. Currently, the town’s closest high school and community college are 22 miles northeast in Yuma.

For the majority of the 20 districts that converted schools to charters, the motivations for conversion are less apparent.

Humboldt Unified School District in Prescott Valley, for example, stated in an online frequently-asked-questions sheet that the conversions are “an opportunity to give parents choices, a way to offer signature programs at each of our schools and a way to expand our programs for our current students.” The district did not provide details of any new programs it planned to begin at its newly chartered schools in the FAQ sheet, nor in charter or application documents submitted to the State Board of Education. Officials made clear they planned to hash that out later, after the charters had been approved.

“Principals will work with their community, current parents, site councils, and PTOs (parent-teacher organizations) to determine what they want their students to experience in the Humboldt Unified School District,” Humboldt officials wrote in the FAQ sheet.

Humboldt’s five converted charter schools will net the district at least $157,220 in additional assistance in their first school year, and at least $2.2 million annually after that.

Noting that the state provides the additional assistance through its general fund, Humboldt offered taxpayers reassurances: “The additional capacity HUSD would receive for its charters will not increase the taxes of our local area residents.”


	Families, business owners and local hospital officials had asked Crane district in Yuma to establish an academy to encourage students to learn science and math skills that could eventually lead them to fill local jobs in health and science fields.

In documents sent to the State Board of Education to convert five elementary schools and one middle school, Maricopa Unified School District wrote that its converted schools were taking part this year in a program launched at Vail Unified School District, “Beyond Textbooks,” which enables teachers in different districts around Arizona to share materials and resources for lesson planning and classroom instruction.

Several traditional public schools also use the program. The Maricopa district proposed no other significant programming changes in the records it submitted to the state board.

With six schools operating as charters, the district will boost its budget by at least $310,585 this school year, and then $2.8 million in additional assistance annually starting in the 2014-15 academic year.

Paradise converted

Paradise Valley Unified School District’s five-member governing board in May voted unanimously to convert 11 of its schools to charter schools, making it the largest district in Arizona to have opened charters. The $7.2 million in additional assistance that the district anticipates in the 2014-15 school year will boost a district maintenance and operations budget that currently tops $192 million.

When asked if Paradise Valley district had converted the 11 schools primarily to take advantage of the state’s additional assistance, superintendent Jim Lee wrote in an e-mail response: “The district has invested a great deal of effort to respond to the Legislature’s call for more parent choice in education. . . . The Arizona Department of Education created a chartering process to support educational choice, and the district has opted into this process to better support the variety of academic and school leadership choices we offer.”

An estimated 6,300 students—about 20 percent of Paradise Valley district’s 32,000 students—are enrolled in the district’s charter schools.

Days after the Paradise Valley governing board in May unanimously approved the charter school conversions, district officials posted a fact sheet on the pvschools.net website that told parents, “Converting these schools to district charters will allow the district to access higher levels of funding in support of these programs and student achievement.”

“The change will not affect operations at these schools,” district officials also wrote.

Dysart Unified, Litchfield Elementary, and Washington Elementary School District officials had made similar assurances to their communities about their charter school conversions in fact sheets and videos on their respective websites, promising that operations would remain unaffected while they could “access higher levels of funding.”

None of the schools selected for conversion were among Paradise Valley’s poorest-performing schools. Eight of the Paradise Valley schools now operating as charters had received A’s for the school year and the remaining three had received B’s.

Other Paradise Valley schools have much more room for student improvement: Eight of its other schools received C’s (including three middle schools) and one received a D.

Self-made contract

Public districts have exploited the state’s additional assistance because of ambiguities in state law. One of those issues now under discussion is who can and should be involved in the authorization of new charters.

Any of these entities in Arizona can authorize a charter school: a school district governing board, the State Board of Education, the State Board for Charter Schools, a university under the Arizona Board of Regents, a community college with more than 15,000 full-time students, or a community college district with more than 15,000 students.

When a public district in Arizona wants to open a charter school, it must submit an application to its local governing board for approval and then apply to the State Board of Education. The application includes an education plan describing the charter school’s academic offerings and curricula, a business plan, an operational plan, and a criminal background and fingerprint check for the applicant.

Staff at the State Board of Education check the paperwork to ensure the district has complied with the application requirements. In the end, the public district’s process, from planning and writing an application and charter to submission and approval, may take only a few months to complete.

Charter school applicants who go through the Arizona State Board for Charter Schools, however, face an intensive two- to three-year review and approval process. In addition to submitting an education plan, a business plan, operational plan, and criminal background and fingerprint check, the organization applying to the Arizona State Board for Charter Schools must provide a governing plan and evidence of a contract with an independent governing board to oversee the school. The board exists to ensure the school is accountable for complying with education standards. The applicants pay a $6,500 processing fee. They cannot open their school without a contract approved by the state charter board.

“We should expect that it would take longer for a new school to start up because they are effectively a new small business. District conversions are simply changing their official status,” said Butcher of the Goldwater Institute. “It’s important that when a local governing board approves a conversion, that there is some element of independent oversight.”

State laws A.R.S. 15-183, does not specify that a public district must have an agreement with an independent board, other than its local governing board, to oversee the school, effectively allowing the district to agree to a contract with itself. All 59 public school applications this year relied on their local governing boards both as the charter school authorizer and as the school’s overseer, Arizona education records show.

Eileen Klein, a former chief of staff for Gov. Jan Brewer who is a member of the state board, said self-authorization is a conflict, especially when an incentive is at stake.

“You don’t just allow people to just notify you that they intend to become a dentist, and you can’t just let anyone become a dentist,” Klein said. “With the amount of taxpayer money involved, there’s probably a greater expectation (for accountability) than just filing a notice that ‘We’re opening a charter school.’”

Although the applications are the responsibility of the State Board of Education, board members note the law does not give the board itself any super-authorization over the public district applications approved by local governing boards.

State education officials have asked the Arizona Attorney General’s Office to issue an opinion on whether public districts must work with independent boards, separate from their local governing boards, for the authorization to open new charter schools.

State board members interviewed for this story said they believe legislators need to clarify the law because the board has limited powers. “We cannot supersede the law,” said state board member Jaime Molera.

Molera said the surge in district-run charters is worrisome, and he questions whether some of the districts are contributing to the enhancement of school choice in Arizona or exploiting the additional assistance. “Being able to double-dip is not a good policy,” he said. “It’s disingenuous.”

Butcher said state legislators should strive to maintain multiple authorizers that include local school districts, as well as colleges and the Arizona State Board for Charter Schools. The problem legislators should target, he said, is the financial incentive for converting a school.

“If a district’s going to convert a charter school, let’s make sure they have an independent governing board,” Butcher said. “Obviously, there are some perverse incentives to having them get a financial boost for doing nothing but changing words on paper.”

Performance standards

The trend of conversions also exposes disparities in the checks and balances of Arizona’s standards for district-run charters and typical charter schools.

Arizona laws require every charter school including those run by traditional public districts, to provide an education plan with a performance framework to set academic goals and gauge school performance. The schools’ authorizing boards review their performance every five years, but the stringency of those plans varies greatly from district-run charter schools overseen by their local governing boards, to charters overseen by the Arizona State Board for Charter Schools.

Authorizers for district-run and private-run charters are required to review school performance every five years.

The state charter schools board bases its framework for measuring successful or struggling charter schools on the best practices of national charter school authorizers, said DeAnna Rowe, executive director of the Arizona State Board for Charter Schools.

The framework relies on indicators such as student progress over time, student proficiency in tested subjects such as math and reading, the state’s A-F letter grades for school performance, as well as graduation rates and college readiness, which can be measured by college entrance exams such as the ACT. The board also considers metrics such as a school’s student proficiency rates compared with state averages.

The board uses the full scope of data to determine whether a school is successful or requires intervention, which could include closure.

From 2006 to 2011, 130 charter schools shut down for reasons ranging from low enrollment to problems with finances, facilities, management, and contractual violations, the Arizona State Board for Charter Schools’ records show.

Authorizers of district-run charters—local governing boards—develop their own framework to monitor a school’s performance.

“They do get to create [their own standards], so it’s not something prescribed,” Rowe said.


	Science and math problems are intertwined with writing and reading lessons at Gowan Science Academy for students at the school, currently serving first through fourth grades. Eventually, the school will expand from a first through fourth grade to a full K-12 science academy. The fourth graders (above) could attend high school here.

In the education plans submitted to the State Board of Education this year, none of the 20 districts outlined plans for closing poor-performing schools if their charters fell short of academic standards. Most of the districts listed the following indicators for monitoring their schools’ performance: completion and distribution of the state’s school report card; surveys of parents, students, and staff; evaluations of student academic performance and results of the Arizona Instrument for Measuring Standards test or the new national test (PARCC) that the state adopted to replace AIMS; district-level assessments; staff evaluations; student presentations of projects and products; and the Arizona Learns Achievement Profile, which rates overall student performance.

The State Board of Education can intervene and implement a school improvement plan if half the schools in the district, or at least six schools in the district, received a D or an F for overall performance on the annual state letter grades. Closure, however, is not specified in the state law, A.R.S. 15-241.01, as an option for intervention.

If a charter school receives an F, the Arizona Department of Education must notify the charter’s sponsor and then recommend steps to improve the charter’s performance or consider revoking the charter.

“There’s no funding lost by this board (for charter schools) if we close a poor-performing school,” Rowe said. “But if a district is faced with that choice, what decision do they make?”

Curbing incentive

Steve Schimpp, deputy director of the Joint Legislative Budget Committee, projected in a June 2013 memo that the charter-school conversions would drive a $22 million increase in the overall funding for Arizona education in fiscal 2015, a $39 million increase in fiscal 2016, and a $52 million increase in fiscal 2017.

The projections account for losses in growth, capital and transportation funds that school districts cede when opening charter schools.

“These estimates are very speculative and could be higher or lower than forecast,” Schimpp wrote to the committee’s director, Richard Stavneak. “There is a greater possibility, however, of these projections being understated given the financial incentives.”

To stem the flood of conversions, Senate president Andy Biggs, R-Gilbert, this year proposed a moratorium on district-run charter schools, but legislators rejected the idea.

“I think a moratorium has value if the intent is to pause this movement so that the Arizona State Board of Education and the Arizona Department of Education can get their arms around the implications for transparency and school accountability,” said Butcher, the Goldwater Institute’s education director. “If these schools are in fact going to meet the mission that charter schools have to have, then I think there is some wisdom in that.”

The school districts also are braced for a legislative battle over district-run charters in 2014.

Although Paradise Valley district officials were confident their schools represent genuine efforts to offer school choice, assistant superintendent Thomas Elliott said the district has decided to put the estimated $1.5 million in additional assistance for the charter schools this year into a contingency fund amid anticipation that state legislators will restrict district-run charters.

Until a resolution is reached, state budget analysts anticipate other districts will pile on to the bandwagon for additional assistance.

>>> Read Jonathan Butcher's Policy Recommendations: Keep Arizona Charter Schools Independent from Traditional School Districts

Legislators and charter school advocates worry the sudden rise in district-run charters is a money grab by the traditional public districts. Several of the districts are increasing their budgets with “additional assistance” funds for charter schools without fulfilling the state’s primary purpose for charter schools – to increase educational options for students. Public districts receive on average $8,992 per student from the state, which is $1,532 more per student than typical charter schools, according to a comparison the Arizona Joint Legislative Budget Committee released in September. This is largely because public districts receive state funding for transportation and capital funds, while charter schools do not. Thursday, December 12, 2013 (All day)ImageGaming the SystemDistricts Make Dash for Cash in Charter SchoolsEducation Reform Investigative ReportYes Copy of District Sponsored Charter School Conversions 2013-6-26.pdf District Sponsored Charters - 2012-13 Letter Grades.pdf charter school infograph.pdf Gersema-Charter Schools.pdfcharter school, education reform, arizona, emily gersema, district schools, funding, jonathan butcherBy TopicsEmily Gersematrue

Dollars, Flexibility, and an Effective Education: Parent Voices on Arizona’s Education Savings Accounts

lcaldwell — Thu, 03 Oct 2013 17:48:08 +0000

Executive Summary:

Kimber Cartwright was optimistic when her son’s teacher said he would be moved to a different classroom. Doctors had diagnosed Kimber’s son, David, with multiple special needs, including cerebral palsy, sensory integration dysfunction, and microcephaly (a neurological condition), so Kimber knew David could benefit from more individual attention. Weeks went by and still David was not moved, which frustrated Kimber. “My son was being completely left behind with no attention whatsoever,” Kimber says.

When education savings accounts became a reality in Arizona in 2011, Kimber jumped at the opportunity for David. “So far, it’s been the best experience,” she says. “We’ve been able to choose what school he goes to, what therapies he uses, and even add extra curriculum to the private school that he’s in.”

Arizona’s education savings accounts are the most innovative way for parents to find a great education for their child. The Arizona Department of Education deposits 90 percent of an eligible child’s funding from the state funding formula into a parent’s private bank account. Families then use a debit card or an online payment service such as PayPal to pay for such expenses as textbooks, private school tuition, online classes, and tutors. Each account results in a cost-savings to the taxpayer, demonstrating that a high-quality education can be provided for less than what taxpayers pay for public schools.

On May 8, 2013, the Goldwater Institute conducted a focus group for savings-account families. Key findings include:

• 94 percent of participants said they were “very satisfied” with education savings accounts, while 6 percent were “somewhat satisfied”;

• Parents report that the public school and district officials they encounter say they have a low level of knowledge about education savings accounts; and,

• Parents say it is a significant challenge to renew their child’s special needs diagnosis at a public school, which is required to remain eligible for a savings account.

Arizona lawmakers should use the findings from this focus group to streamline the renewal process for special needs classifications and expand the eligibility criteria so more children can benefit from an account. In addition, policymakers should conduct more surveys of participating parents or outsource such a project in order to solicit more feedback, improve the program, and better serve Arizona children.

Read the full report here.

Moving Forward: A Road Map for Choice and Competition

jgunderson — Fri, 12 Jul 2013 19:57:12 +0000

Choice and competition can drive Arizona's electricity market to produce more power at a lower cost - with greater economic efficiency propelling greater economic growth and job creation. Since restructuring their electricity markets for choice and competition, Pennsylvania and Texas have seen their capacity increase nearly 25 percent and 45 percent respectively. Texas has seen prices drop 13 percent below the national average. Texans choose among numerous competitive electricity retailers and plans, much like Arizonans choose from multiple cell phone service companies and plans. These experiences are not isolated - countries around the world, including the United Kingdom, New Zealand, Canada and Chile, have similarly restructured their markets for choice and competition, and have similarly experienced greater capacity and lower prices as a result.

That does not mean, however, that restructuring for choice and competition is an easy or instantaneous process. It must be done right. Fortunately, competitive electrical markets in the United States and around the world are now mature enough to chart out a road map for Arizona to follow. This article provides that road map with specific recommendations tailored to Arizona's unique market conditions to ensure the reform is a success.

In essence, the Arizona Corporation Commission needs to restructure Arizona's electricity market for choice and competition in three phases. First, ACC should separate existing utilities from their generation, transmission, and distribution capacity to prevent them from abusing the monopoly power they have accrued under the existing regulatory system. At the same time, a system operator needs to be empowered to neutrally balance the load on the grid that will be created by an influx of competitive energy producers. Second, the ACC should take action to create competitive generation markets in which energy producers can freely enter, exit and compete for business. Third, customers should be empowered by the ACC with the freedom to choose among competitive retailers of electricity. If these steps are taken in the right order, Arizona's electricity market will finally move forward towards greater capacity, choice, competition, innovation and lower prices - spurring new economic growth and job opportunities for Arizonans.

Read Moving Forward: A Road Map for Choice and Competition in Arizona's Electricity Markets and A Time for Choosing: Why Choice and Competition in Electricity are Right for Arizona.

The Goldwater Institute's filing before the ACC in support of restructuring Arizona's electricity markets for choice and competition.

The Goldwater Institute's reply brief in support of Choice and Competition.

Choice and competition can drive Arizona’s electricity market to produce more power at a lower cost—with greater economic efficiency propelling greater economic growth and job creation. This article provides a road map with specific recommendations tailored to Arizona's unique market conditions to ensure reform is a success.Monday, July 15, 2013 - 12:53ImageThe Future of Energy PolicyChoice and Competition Means More Power at a Lower CostBusiness & Job Creation Government Accountability Report Policy ReportYes GWIElectricity Brief4.pdf GWIPolicy ReportSteps2Restructuring.pdf GI Reply brief in Support of Choice and Competition.pdfACC, restructuring, electricity By TopicsAndrew N. Kleit Nick Dranias Byron Schlomachtrue