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Preventing fraud and abuse in education savings accounts

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Preventing fraud and abuse in education savings accounts

Heist movies like "Ocean's 11" and "The Italian Job," where thieves steal off into the night with the loot, make for great theater. But in real life, especially when it comes to programs that provide assistance to families, like Medicaid and food stamps, fraud amounts to a waste of taxpayer dollars.

Arizona's education savings accounts, which establish bank accounts for parents to use for their child's education, are also not immune to fraud. The state provides parents with check cards, and parents can use the funds at various stores and for education programs, like online classes.

Currently, the Arizona Department of Education is auditing every account quarterly and poring over receipts to make sure the money is used for education expenses. But going through receipts individually will overwhelm a small staff when another 87,000 students in failing schools become eligible for the accounts next school year. To their credit, the department has already caught individuals attempting to game the system. Here are a few other ideas the department should consider to help prevent abuse:

Conduct random audits, along with quarterly and annual reviews, and hire or outsource auditing help. Strengthening investigative units led to success against Medicaid fraud in Texas, reports Manhattan Institute's City Journal. Between 2003 and 2004, Texas "recovered" $441 million from fraudulent transactions.

Create a fraud reporting system with a telephone hotline and online forms, like Arizona's Health Care Cost Containment System (AHCCCS). The state should also commission "compliance buyers," or investigators who pose as parents and try to commit fraud in order to find weaknesses in the system.

Have parents buy surety bonds using account funds. These bonds are insurance vehicles that would require bond holders to repay any misspent money. Public notaries and construction contractors regularly use these bonds, and the up-front costs are small on an annual basis. Many financial institutions offer this product.

Eliminating any misuse of funds in public programs is impossible, but there are steps that can be taken to make it harder to abuse the system. I hope the Arizona Department of Education will consider taking more steps to protect students using education savings accounts.

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