With the Alabama Accountability Act’s provisions entering the second school year, here is a little better look at Scholarship Granting Organizations (SGOs) and what role they play in assisting students who choose to attend nonpublic participating schools (see this for more information about nonpublic participating schools).
The questions and answers below have absolutely nothing to do with the Parent Tax Credit portion of the AAA. The following information and guidelines only apply to SGOs.
What Is an SGO?
SGOs are legally-formed nonprofit corporations that accept donations that can be used to pay for a student’s private-school tuition and costs to transfer from a “failing” public school. SGOs were granted authority to operate in Alabama with the passage of the Alabama Accountability Act (AAA) in 2013.
How Does a Donation to an SGO Generate a Tax Credit for the Donor?
Individuals and corporations who make donations to SGOs can reduce their actual income tax owed to the state of Alabama during a given tax year. This is called a tax credit. A tax credit is different than a tax deduction, which reduces total taxable income and would incrementally affect a taxpayer’s income tax liability. A tax credit reduces actual income tax owed, dollar-for-dollar.
The maximum allowable credit for an individual taxpayer is $7,500 or 100% of that donation, whichever is less. The allowable credit for a corporation is limited to 100% of the amount of its donation, with no cap on the total donation.
The total tax liability for either an individual or a corporation can only be reduced by 50% for that tax year.
If the donation is more than the allowable tax credit, the tax credit can be carried over for up to a total of three years.
Because the cap for tax credits for a calendar year is $25 million, those tax credits must be reserved through ADOR’s online reservation system after donations are made in order to ensure the tax credit will be granted. See “Reserving Tax Credits” on this page for details.
Which Students Are Eligible for Scholarships from SGOs?
There are two definition of eligibility: one for an eligible student zoned to a “failing” public school, and one for students who are not zoned for a “failing” public school.
For students who are zoned to a “failing” public school, the income upper limit is 150% of the median Alabama income, which comes out to around $62,000 for 2013.
For students who are not zoned to attend a “failing” public school, the income upper limit is two times the federal poverty level (FPL). The 2014 FPL guidelines are below.
SGOs are allowed to collect and distribute donations for other scholarship purposes, but those monies cannot be commingled with the AAA scholarship funds.
What Are the Rules for How Scholarships Can Be Granted?
SGOs are allowed to determine their own application processes and approval guidelines as long as there is no discrimination on the basis of the race, gender, religion, color, disability status, or ethnicity of the student or of the student’s parent.
The AAA did delineate a number of parameters within which SGOs must operate:
Scholarships can only be granted to students attending nonpublic qualifying schools.
75 percent of first-time recipients of educational scholarships may not have been continuously enrolled in a private school during the previous year.
Put another way, that means that not more than 25 percent of the scholarships (awards, not dollars) can be awarded to students who were continuously enrolled in private school the previous year. However that rule no longer applies to students after the first year they receive a scholarship.
A portion of expenditures on educational scholarships for low-income eligible students must be equal to the percentage of low-income eligible students in the county where the SGO expends the majority of its educational scholarships.
A new rule was created in April to better define how that percentage is calculated. That rule states that the SGO can use the county school system’s rate of students who are eligible for free or reduced-price meals OR a method they choose and justify to ADOR.
Educational scholarships can only be provided to students who would otherwise attend a “failing” public school so that the student can attend a nonpublic school or a nonfailing public school.
However (and this is a BIG however), any scholarship funds not granted to students zoned to attend a “failing” public school on September 15th of each year may be made available to low-income eligible students (defined as families whose income is not more than twice the federal poverty level) to defray the costs of attending a qualifying school, whether or not the student is assigned to a failing school.
The House passed a bill during the 2014 legislative session to roll that date back to May 15, but the bill did not make it to the floor of the Senate. Expect that bill to come back during the next legislative session.
95% of donations must be spent on educational scholarships.
All investment income must be spent on educational scholarships.
All donations received in a calendar year must be spent by the end of the following calendar year.
Given the other parameters under which donations collected for tax credit purposes can be distributed, SGOs will need to be careful to ensure this rule is followed.
What Type of Academic Accountability Is There?
Remembering that SGOs can only grant scholarships to students attending nonpublic qualifying schools, these are the academic assurances that a nonpublic school must provide in order to gain status as a qualifying school:
So the nonpublic qualifying school agrees to provide test results both to parents and to ADOR on an annual basis. Graduation rates will be provided as well.
ADOR is not required to publicly report those test results until AFTER the third year of “test and test-related data collection”. That means the public will know nothing about academic progress of students in nonpublic qualifying schools until after the spring 2016 tests are given for those nonpublic qualifying schools who began participating prior to the start of the 2013-2014 school year.
According to the AAA, the test results will be “aggregated by the grade level, gender, family income level, number of years of participation in the tax credit scholarship program, and race of the student.”
It will be up to parents of students who are attending nonpublic qualifying schools to determine whether their child’s academic achievement improves in the nonpublic school.
It is unclear whether graduation rates will be made public.
What Reports Will Be Publicly Available About SGOs?
SGOs are required to file annual reports by June 1 of each calendar year, giving details about compliance the scholarship program. Here is the form SGOs must complete.
Those reports are not public reports. ADOR officials stated those are considered akin to tax returns and will not be released to the public.
So what are SGOs required to share with the public? Section 16-6D-9(b)(1)j requires SGOs to publicly report the following:
- the name and address of the scholarship granting organization,
- the total number and total dollar amount of contributions received during the previous calendar year,
- the total number and total dollar amount of educational scholarships awarded during the previous calendar year,
- the total number and total dollar amount of educational scholarships awarded during the previous year for students qualifying for the federal free and reduced-price lunch program, and
- the percentage of first-time recipients of educational scholarships who were enrolled in a public school during the previous year.
Earlier today, Curtis Stewart, Deputy Commissioner of Revenue at ADOR, stated that ADOR will release a report in the next week or two with this information. However, due to the low number of participants during calendar year 2013, he believed the information would not be available in much detail in order to prevent releasing information that might reveal identities of children.
By next year, the numbers of recipients will be larger, and more detailed information could be released, Stewart said.
Summing It Up – What You Need to Know About SGOs
SGOs are nonprofit organizations.
Donations to SGOs can generate tax credits, subject to caps and guidelines.
SGOs can grant scholarships to children zoned to “failing” public schools or nonfailing public schools.
SGOs are granted authority to define their own application and granting process, as long as they do not discriminate based on race, gender, religion, color, disability status, or ethnicity of the student or of the student’s parent. .
A student zoned to a “failing” public school is eligible for a scholarship if the student’s family income does not exceed 150% of the median Alabama income.
Scholarship funds not granted and disbursed prior to September 15 can be awarded
to students meeting low-income eligibility guidelines (twice the federal poverty level).
No academic accountability information will be made public until the nonpublic qualifying school has tested scholarship recipients for three years.
Public reports will be made available showing dollars raised, the number of scholarships awarded, the percentage of students receiving scholarships who are eligible for free or reduced-price meals, and the percentage of first-time recipients who were enrolled in public school the previous year.
These two SGOs have a lot of information about SGOs on their web sites.