State lawmakers approved a tax credit three years ago to fuel donations to nonprofits charged with giving tuition grants to children with disabilities to attend private school.
But a recent state audit of the largest nonprofit raising money for the program found a problem.
Every parent in 2014 who donated to Palmetto Kids First Scholarship Program and requested a scholarship from the nonprofit received the tuition assistance – about 60 donors overall.
The S.C. Department of Revenue audit, obtained by The State, said the arrangement constituted a quid pro quo – the understanding that parents who donate will receive scholarships for their children. That violation of the state’s first ever private school-choice law could have had the nonprofit punted from the program, the audit says.
Some taxpayers who donated to the Palmetto Kids also broke tax rules, state tax officials said.
If donors whose children receive scholarships also claim a tax credit, they’re effectively “double dipping” – gaining financially, depending on the circumstances.
For example, if parents donate $10,000 to a nonprofit, they could break even by getting the same amount back in a scholarship. Then they could profit by claiming a tax credit on their donation – potentially reducing their tax bill by $10,000.
The audit found that a donor who receives a scholarship from the same nonprofit where they sent a contribution cannot claim a tax credit for the value of the scholarship.
“Certainly no one could have intended for people to make money off of this,” said Scott Price, executive director of the S.C. School Boards Association, which has called for greater accountability in the choice program.
Sen. Wes Hayes, R-York, who chairs a panel that will soon take up proposals to change the private school-choice law, agreed: “That was not our intent when we passed the law to get the scholarships: to make it to where people would make a profit.”
Palmetto Kids First is the only of the four scholarship nonprofits in South Carolina that, before the audit, accepted donations from parents and awarded scholarships to donors, the audit found. They also aggressively targeted parents and private schools to buy-in to the program and touted the tax benefits of donating.
One Columbia-area private school expressed concerns that Palmetto Kids First’s approach could mislead parents.
Palmetto Kids First’s director said her nonprofit did not break the law, but the program has agreed to make changes recommended by Revenue Department.
To avoid that confusion, other nonprofits forward scholarship requests from donors to another scholarship group. They also refund donations from parents of scholarship recipients, they say.
This year, up to $12 million in tax credits are available in part for donations made to nonprofits that offer the tuition grants and for parents who pay tuition out of pocket for children with special needs.
But as demand for scholarships grows and pressure builds to double the amount of available tax credits that spur scholarship donations, critics have fear abuses.
They have said the neediest children would be overlooked, while wealthier parents take advantage of both benefits of the program — tax breaks from making a donation and scholarships that lower tuition bills.
The state Revenue Department audit offers evidence justifying at least one of those fears.
At the heart of the state Revenue Department review was the question of whether the nonprofit was giving scholarships to the children of donors, who may also claim unfair tax benefits.
Donations to nonprofits, including Palmetto Kids First, qualify for tax credits reducing a donor’s tax liability by up to 60 percent.
But the law governing the choice program bans a donor from designating a contribution to a scholarship program for a specific child or school.
A review of the nonprofit’s 2014 activities found that Palmetto Kids First targeted parents for donations and granted scholarships to all parent-donors who asked for financial assistance.
In the first half of 2014, 8.2 percent of the nonprofit’s donors also received scholarships. In the second half of the year, 14.4 percent of donors received scholarships, according to the audit.
Overall, about 30 donors in each six-month period – or 60 total – received scholarships, the agency said.
While the Revenue Department audit offered no direct proof parents were promised scholarships in exchange for donations, the tax agency pointed to the Palmetto Kids First’s marketing techniques.
Revenue Department spokeswoman Ashley Thomas said donors receiving scholarships from the same nonprofit where they made a contribution is the same as designating a school or child as the beneficiary of the contribution.
’Focus on the kids’
Palmetto Kids First’s leader, Olga Lisinska, said the nonprofit makes no promises of granting scholarships in exchange for donations.
Lisinska has said her calculation of how many donors whose children received scholarships was much lower — less than 3 percent. Those grants accounted for $333,535 of the $12 million that the nonprofit had raised, she said a year ago.
Palmetto Kids First has continued operating, after it agreed to cease giving scholarships to parents who donate and accepting donations from parents of scholarship recipients.
Scholarship donors who failed to follow the state tax regulations, however, might not be off the hook.
The Revenue Department has not decided whether to take action against those taxpayers, Thomas said, adding that the agency’s goal has been to bring the nonprofit and taxpayers into compliance with the law.
As for Palmetto Kids First, Lisinska says she’s setting aside legal disagreements with state regulators to focus on convincing lawmakers to double the tax credits available through the program to $25 million.
“We do want to put all these issues ... behind us so we all can focus on the kids,” she said.
Growing pains in ‘choice’ program
Palmetto Kids First, the largest and most active private-school scholarship nonprofit in the state, has provided a test case for lawmakers and advocates trying to improve the state’s first private school-choice program.
The Revenue Department began looking at Palmetto Kids First in late 2014 after the nonprofit was accused of pressuring parents of private-school students to donate to the program.
Palmetto Kids First founders – whose interactions with the tax agency have been rocky – do not see anything unlawful about donors to their nonprofit receiving their scholarships as long as parents do not expect a grant automatically in return for contributing, they said.
But since the beginning of the program, Palmetto Kids First has aggressively pushed the program to parents to donate, saying the buy-in would help the program thrive.
In a 2014 email to Glenforest School in West Columbia, Palmetto Kids First co-founder Jeff Davis noted the number of scholarship requests from the school and said, “As of today the number of Glenforest families ... who have donated to the program is approximately ... ZERO?”
At the time, Davis told The State that out of fairness, there was some connection between schools that received scholarships and the parents who donated.
Davis has since distanced himself from Palmetto Kids First because of his troubled financial history, but he is still a key player advocating for the scholarship program with Lisinska, his wife.
Revenue officials said they feel confident Palmetto Kids First is on the path to compliance and wants to see the program continue. “The Department conducted this review to protect the integrity of the program and to ensure its benefit to exceptional needs students as intended,” Department of Revenue Director Rick Reames said.
A ‘wonderful program’
To offer parents another option for financial relief not involving the nonprofits, lawmakers created an additional tax credit in mid-2015 for parents who pay private-school tuition out-of-pocket.
Parents who send eligible special-needs children to private schools can claim that credit, refunding up to $10,000 of what they pay for tuition.
Nothing in South Carolina’s school-choice law requires that parents prove financial need to claim a credit for tuition paid or for donations make to scholarship organizations. But some of the scholarship nonprofits say they take a family’s financial status into consideration when awarding grants.
For parents like Midlands resident Angela Gantt, the program has been a big help. Since she decided to move her children from public to private school, she has been paying half her salary to send her two severely dyslexic sons to attend Northside Christian Academy in Lexington. This year, her sons are on scholarships from Palmetto Kids First.
It’s a “wonderful program,” said Gantt, who says she has not donated money to the nonprofit. “But the funding is not there for many more children who are in need.”
Hayes, the lawmaker tasked with reviewing the program, said he’s glad the Revenue Department is taking steps to stop donors from claiming tax credits when they also receive scholarships.
Also, he added, taxpayers who make enough money to need a tax credit probably do not need a scholarship, he said, referring to the donors the state audit identified as donating, receiving scholarships and claiming some tax benefit.
Hayes, whose committee will consider renewing the choice law soon, said he would look into whether lawmakers need to improve the law.
The program has been wildly popular with nonprofits raising money and reaching the caps in available tax credits quickly.
So far, S.C. taxpayers already have claimed $8 million in tax credits for donations made to the scholarship nonprofits. Lisinska said it took her nonprofit and others less than a month to raise that amount. Taxpayers have claimed $1.5 million of $4 million allotted for the newer tax credits for private-school tuition.
Lisinska hopes lawmakers allow an increase in tax credits to benefit the program.
“Overall, the program is working great,” Lisinska said. “We just need the $25 million to fully fund all of our kids (who apply).”
S.C. private school choice
A look at the program created to help children with disabilities pay for private school:
$25 million Amount the state’s leading scholarship-granting nonprofit, Palmetto Kids First, says is needed to fully fund scholarships for all applying students next year
$12 million Total tax credits the state has granted this year to pay for the program
101 S.C. private schools where students eligible to receive scholarships can attend
1,066 Number of grants schools reported receiving in the 2014-15 fiscal year
SOURCE: S.C. Department of Revenue, its audit of Palmetto Kids First and the S.C. Education Oversight Committee