Key Points: 

• Treasurer, Department of Education review ESA vendors amid program concerns  

• State seeks stronger auditing, automation and oversight to curb misspending

• Current vendor to participate but could face competition in contract renewal

School choice financial platform vendors are likely to file into Arizona over the following weeks to give their pitch for how best to house and manage the state’s Empowerment Scholarship Account program in the face of rapid expansion and reported misspending.

State Treasurer Kimberly Yee recently issued a Request for Information (RFI) to assess the market, with the aim of improving operations in the ESA program in the face of inadequate auditing and improperly spent funds. 

The vendor inquiry is the first step in the Request for Proposal (RFP), in which the state could either stick with its current vendor, ClassWallet, or opt to ink a contract with a new company next year. 

ESA leadership has emphasized the need for a platform with a robust auditing system, data dashboards, and new technologies to detect misspending and fraud. 

“Arizona’s needs have evolved so rapidly in this ESA space, and so we really are excited to see what opportunities all of these platform providers can show us,” ESA Director John Ward said. “ESA is always in the headlines. I think there are many groups that want to keep us there, and so we always want to ensure that we are evolving.” 

Enrollment and funding continues on an upward trek all while administrators are continuing to contend with reports of inadequate auditing practices from the auditor general and an ongoing public monies investigation by the attorney general. 

As of June 1, 101,128 students are enrolled in the ESA program, shaking out to more than $1 billion in scholarship awards. 

The Department of Education continues to operate under a policy automatically allowing any item or service under $2,000, with plans to audit after the fact. And though the department reported auditing 25% to 30% of those purchases, a report from the auditor general found the percentage of transactions actually assigned for audit flexed from 6.5% to 23.8% from September to November. 

The report also noted the department failed to include all transactions that should have been subject to audit, and, as “a result, expenditure transactions for explicitly unallowable items such as amusement park tickets, airline tickets, hotels, meals, and other travel expenditures were purchased using Program monies.” 

As program administrators work to get a tighter grip, Yee announced she would be putting out a RFI to assess current and prospective financial vendor capability. 

“That platform, I believe, can be improved. We are trying to find what those improvements are,” Yee said. “We’re asking questions of the Department of Education. What are your deficiencies? What are your needs? What’s working?” 

The final RFI, published by the Arizona Treasurer’s Office on May 27, seeks input on account set-up, functionality, funding processes, user experience, transaction processing, cashflow management, data dashboard tools, audit management tools, emerging automation technologies, customer support, pricing and cost. 

Ward said the department helped shape the inquiry by putting together a wish list of what he, his managers and staff would like to see in a platform provider.

He identified audit management as the first priority, noting no such function exists currently on ClassWallet. 

“We document all of our audits in scores and scores of spreadsheets, we need to not do that,” Ward said. “We actually need an audit management software system that’s either built into a platform. And if that doesn’t work, then we’re going to have to go out and get that from someone else. But we absolutely need that.” 

Ward said automated tools to assist in curbing misspending and fraud remains top of mind. 

Superintendent of Public Instruction Tom Horne said the department was working with ClassWallet to automate purchase review and improve auditing, claiming the program would be “perfect” after rolling out the new artificial intelligence tool. 

Though Ward confirmed he was working with and pressuring ClassWallet on automated assistance, implementation is still a ways out. And in any case, he warned against AI as a cure all. 

“Everyone assumes that AI is some type of easy silver bullet or panacea, but the reality is AI is still an evolving technology,” Ward said. “AI tomorrow is not going to solve all of our problems, but we need a vendor that is going to be placing a lot of resources on leveraging AI to the greatest extent possible for us.” 

The RFI is in search of information on the “current options available to handle the continuous growth of the program” with a RFP to follow after the fact. 

ClassWallet was first awarded the contract uncontested in 2019. In 2023, the state treasurer again awarded the company a contract stretching until the next fiscal year. 

During the last RFP process, three additional companies entered the running: Odyssey, Student First Technologies and Merit International Inc. And as state school choice programs have expanded, as have the four companies. 

ClassWallet operates ESA programs in Arizona, Arkansas, Indiana, Ohio, South  Carolina, North Carolina and New Hampshire, and administers grants or tax-credit programs in Idaho, Texas, Georgia,  Alabama, Missouri and Virginia. 

Odyssey covers ESA, tax credit and scholarship programs in Texas, Utah, Iowa, Georgia, Louisiana, Wyoming, Nebraska, Missouri and Florida. The company previously administered a program in Idaho, too, but lost business to ClassWallet after ongoing issues with payments to vendors and customer service. 

Student First Technologies operates in Tennessee and West Virginia but has run into trouble with technical glitches with their platform. Merit International Inc. previously partnered with Ohio to administer a tax credit act, and worked on the since-shuttered Kansas Education Enrichment Program. 

Odyssey, Student First Technologies and Merit International did not respond to an inquiry on whether they planned to participate in Arizona’s RFI. But Jason Hart, a spokesperson for ClassWallet, confirmed the company would respond. 

“We welcome this RFI and view it as the perfect opportunity to showcase the unmatched depth of our compliance infrastructure, our technological strength, and our ongoing investment in product innovation,”  Hart said. “We are proud to have supported Arizona families since 2019, and remain fully prepared and deeply committed to the continued success of the program.” 

The deadline for responses to the vendor inquiry is July 29.