Yarbrough: What did he spend, and how did he spend it?

by David Safier
The story I wrote about last night — Steve Yarbrough's Student Tuition Organization and the expenses it claims — is in the Star and the Republic today. Jen Darland and Lisa Hawkins, both from Tucson, held a press conference in Phoenix on the topic Monday, and both papers covered it in reasonable detail. They brought out some facts I didn't use, and I made some connections they didn't make.

The story isn't over. I plan to post about it for awhile.

Right now, I want to focus on one aspect: the amount of money Yarbrough's Arizona Christian School Tuition Organization (ACSTO) paid to HY Processing, a corporation also owned by Steve Yarbrough. In 2006 and 2007 (not coincidentally, HY Processing was incorporated in late 2005), ACSTO has paid HY about $400,000 per year. The year before that, in 2005, ACSTO listed its data processing expenses as $24,440.

To get a sense of the kind of processing expenses an STO should incur, you need to understand what an STO does. First, it collects contributions from indivuals, a maximum of $500 per individual or $1,000 per couple. The contributors get 100% of the money back as a tax credit, but the STO doesn't handle that part. It simply banks the money. Then it receives scholarship applications from families who want financial help sending their children to private schools. Finally, it decides how much to give each student, and it dispurses the money.

That's an oversimplification, of course, but not by much. Running an STO is far from rocket science. You take in money, you get requests for the money, you give out the money. The process involves careful record keeping, but the transactions are far fewer and simpler than in most businesses. A simple database run by a few competent employees should be able to do the job nicely.

So how is the $400,000 Yarbrough's STO gives to Yarbrough's HY Processing spent? It's far more than I've seen on the tax forms of any other STO for data processing. In fact, it's about 15 times higher than the $24,440 listed for ACSTO's data processing in 2005, the year before Yarbrough incorporated HY Processing. It simply can't cost that much to process the data.

With data processing, there are obvious economies of scale. Once you've set up a system to process $5 million, it doesn't cost twice as much, let alone 15 times as much, to process $10 million. The cost per dollar should go down, not up.

Has HY Processing gotten heavily involved in the fundraising aspect of ACSTO? That could account for higher expenses, since a more aggressive fundraising campaign would cost more money. But according to the 2007 breakdown on ACSTO's tax return, HY's fundraising-related duties are minor. Of the $426,895 designated as "Processing Expenses," $397,012 are listed under the "Program Services" heading, $21,345 are under "Management and General" and only $8,538 are under "Fundraising."

I ask again, how can ACSTO spend over $400,000 a year in processing expenses? It simply doesn't make logical sense. Unless Yarbrough can come up with a reasonable explanation and back it up with facts and figures, it will continue to look to me like Yarbrough's HY Processing is charging Yarbrough's ACSTO far more money than it should for its services. Something looks very wrong here.

0 responses to “Yarbrough: What did he spend, and how did he spend it?

  1. Kinda Sorta

    rsmantra –

    I am open to a frank and open debate…you seem pretty quiet over there…

  2. Kinda Sorta

    rsmantra –

    You are right I am on one side as I clearly gave full disclosure that I help a handful of these STOs.

    > Do you honestly feel that the buyer beware
    > applies here?

    In what part of American life does “buyer beware” *not* apply?

    Just because a non-profit does not exist to make a profit, the organization still needs to abide by the laws of economics and the laws of the nation.

    For even further disclosure, half of the STOs I help do *not* allow contributors to recommend a student. They provide scholarships 100% on a financial needs basis…would you rank *these* STOs along with the “bottom of the barrel right next to the “Payday Loans and the ‘healers’ of the faith.”?

  3. While you applaud David “I appreciate your genuine curiosity on this matter, as opposed to picking a “side” and digging in your heels.” you have been on a side this whole time Kinda Sorta. The fact that something is currently legal is probably the most problematic here. My goodness, when you start trumpeting free markets with these “non” profits you lose me. Do you honestly feel that the buyer beware applies here? This type of business ranks right down there at the bottom of the barrel right next to Payday Loans and the “healers” of the faith.

  4. Kinda Sorta

    David –

    > Any time you hire yourself, that should be a red flag.

    Red flag, yes. Illegal, no.

    >…how much rigor would it take to sort through
    > those applications?

    If you don’t know yourself, please don’t comment as though you do….and if you believe it’s so easy, seriously, you should run an STO (or consult for them).

    Do it cheaper and better than ACSTO…or help other STOs do it better and cheaper and beat ACSTO at their own game.

    My clients are dealing with these issues – doing it better and cheaper than other STOs. It’s a fine line to straddle.

    > The cost to the state’s revenue is 100%.
    > It’s simply an accounting trick that makes
    > tuition tax credits constitutional and vouchers
    > unconstitutional in Arizona.

    Yeah, this is probably where we disagree most. If you believe the state “owns” a percentage of your wealth and the state gets to spend that hard-earned dollars on whatever they want, then, yes, you are right…

    Unfortunately, I do not. I believe that my tax dollars should be spent on those things that *I* think are important, not what the gov’t thinks is important.

    Just think what would have been if we could redirect our *federal* tax dollars to *non-war* spending or *non-bailout* funding!

    > When a company increases their costs of processing
    > by 700% and their donations increased 33% wouldn’t
    > you start scratching your head?

    Indeed, that does make me scratch my head…but as long as the spending is within 10% of an STO’s donation top line, it’s within the legal boundaries….at that point, it’s up to the competition to be more efficient and underspend and beat ACSTO at their game.

  5. Kinda Sorta,
    When a company increases their costs of processing by 700% and their donations increased 33% wouldn’t you start scratching your head? Come on fella. Whe none STO pays more in legal services than all of the others combined, wouldn’t that make you continue scratching? Let’s put it this way, Kinda Sorta, Rep. Yarborough should be scratched off the State’s Christmas list. The man is receiving too many of our gifts.

  6. David Safier

    Kinda Sorta, I’ll assume you’re a disinterested party who is trying to explain the situation from the standpoint of a professional in the field. So I’ll respond in that spirit.

    When you compare your situation trying to get a contract to the situation where a company owned by Yarbrough is trying to get a contract with an STO run by Yarbrough, we’re not talking about anything like a level playing field. Yarbrough is hardly an objective owner trying to find the best fit for his 501(c)3 organization. And this is an area where 501(c)3 organizations often get into trouble. Any time you hire yourself, that should be a red flag.

    You speak of the rigor ACSTO possibly uses to evaluate its scholarship applicants. But if, as I understand, between 65% and 80% of the donations come with recommendations as to who should get the scholarships, and those recommendations are accepted far more often than not (I also understand that’s true), how much rigor would it take to sort through those applications? Make sure everything is filled out, make sure nothing disqualifies that student, and write the check. Only between 20% and 35% of the scholarships are truly competitive.

    Finally, you say the government isn’t paying for anything. In fact, the government is paying for everything. The cost to the donor is zero. The cost to the state’s revenue is 100%. It’s simply an accounting trick that makes tuition tax credits constitutional and vouchers unconstitutional in Arizona.

  7. Kinda Sorta

    …I’m probably going to regret replying to your last post, but here it goes….

    > are there existing data processing companies
    > with systems already in place that can be
    > adapted to the (it seems to me) comparatively
    > simple operation of taking money in and doling
    > money out? If so, would they be able to do it
    > for less money?

    See my previous response.

    > If a 501(c)3 is spending too much for goods and
    > services, and those goods and services are
    > being provided by people close to the
    > organization, that’s a clear violation of
    > IRS rules as I understand them.

    I’m not a tax accountant. So, I can’t say…

    But for some reason, I don’t think the IRS can deem something as *too much* or *too expensive*…the market determines price, not the IRS.

    > Throw open the books of ACSTO and HY
    > Processing and see if the government is
    > getting what it’s paying for.

    The gov’t isn’t paying for anything.

    The money belongs to the taxpayer…and it is the taxpayer who is directing his/her money.

  8. Kinda Sorta

    > But my understanding is that there is no
    > means test for scholarships coming from
    > personal tax credits (though there is for
    >corporate tax credits), which could make
    > means testing by looking through tax returns
    > less critical.

    True. But, the assumption here is that an STO only looks at income as the sole criteria for offering a scholarship…I believe STOs have the freedom to look at/evaluate all aspects of a scholarship candidate before offering a scholarship…that’s what makes each STO unique. If every STO uses the same criteria to evaluate scholarship candidates, then we would only have one gigantic STO…if that were to happen then what’s the point? may as well have the gov’t process the monies and we’re back at square one: ineffecient spending by the gov’t.

    > Finally, “evaluation costs” don’t explain
    > why ACSTO’s costs are so much higher than
    > other STOs. Are they more diligent?

    Quite possibly. Fixed costs vs Variable costs come into play here…and since ACSTO is now the largest STO, I’m sure there is some degree of “premium dollar spending” – something akin to “not getting fired by hiring IBM”…for the amount of money they take in, they cannot afford to skimp out on operational excellence.

    All STOs have only a few weeks to process all their donations and send out receipts for tax purposes…for the small STO, this isn’t a problem…however, for the larger STOs, they need to be fast and accurate.

    Hope this helps!

  9. Kinda Sorta

    > Second, if I were to go to a new company
    > for processing services, I wouldn’t take
    > kindly to paying far more than the going
    > market rate to help that company get
    > started. I would expect the company to
    > charge something similar to the going rate
    > and take losses for a few years until it
    > covers its initial costs.

    When you say “go to a new company”, I’m assuming you mean “choosing a new vendor”.

    I wouldn’t want to pay more for something if I was getting something that is the *same* as what I was trying to replace. Pay more, get more.

    The one thing you have to consider before bashing an STO is to consider the size of STO. Bigger STOs have to place greater attention to upholding its reputation to its target audience…this quite often means spending premium dollars on a service that an org has confidence in.

    I’ve been consulting for over 13 yrs and there’s a saying: “Nobody ever gets fired for buying IBM”. Unfortunately, I was usually on the losing end of that saying on many contract bids…

    I recently lost a sales prospect to a company called Blackbaud…not because they were cheaper…in fact, they were the most expensive…Blackbaud (look them up – VERY expensive, esp considering they serve non-profit orgs) simply outsold my company by emphasizing something my services couldn’t provide…maybe, the same scenario applies to HY Processing.

    Also, keep in mind: STOs have unique needs (as AZ is about the only state that offers this unique tax law) in both the donation processing side and the scholarship disbursement side. The service provider has to (a) *really* know what an STO needs throughout the year, (b) provide the service/product with extreme accuracy and security (since they deal with financial and personal information).

  10. David Safier

    Interesting answer. Now let me ask a question of my own.

    Yarbrough set up a separate entity, HY Processing, which, I would imagine, has spent some money automating the data processing system. The question I have is, are there existing data processing companies with systems already in place that can be adapted to the (it seems to me) comparatively simple operation of taking money in and doling money out? If so, would they be able to do it for less money?

    If a 501(c)3 is spending too much for goods and services, and those goods and services are being provided by people close to the organization, that’s a clear violation of IRS rules as I understand them. HY Processing seems like a way to outsource services by transferring money from one pocket in Yarbrough’s pants to another. If HY Processing is overcharging for its services, that’s what’s happening, and someone should be held accountable.

    I have no idea if I’m right. But if this is as suspicious as it looks to me, I would say a thorough government audit is in order. Throw open the books of ACSTO and HY Processing and see if the government is getting what it’s paying for.

  11. Kinda Sorta

    tried to post reply, but it doesn’t stick.

  12. Kinda Sorta

    Hi David –

    I appreciate your genuine curiosity on this matter, as opposed to picking a “side” and digging in your heels.

    …onto your questions…

    > First, doesn’t that make the
    > increase in processing expenses
    > from $363,620 in 2006 to $426,895
    > in 2007 suspect?

    It’s impossible to look at numbers this way, especially in isolation. I believe ACSTO’s donation have been increasing at a steady clip over the years…and as revenues increase, an org’s *variable* costs increase proportionally.

    So, to answer your question “is it suspicious?” we would have to look at the marginal increase of their donations…if the increase in donations is roughly the same as the increase in expenses then it sounds about right. (I don’t want to spend too much too time researching and debating, so I’ll leave the digging into AZ DOR archives up to you).

    So, that leaves one to ask: “Wouldn’t it make sense to spend a large amount of up-front (ie: *fixed*) costs and automate as much as possible? Thereby decreasing an org’s variable cost…”…of course, this is my argument as a I am technical consultant.

    The dilemma for STOs is that they have no idea how much they will receive in donations in any particular year. If they plunk down a good chunk of money and they receive less money than they expect, they are SOL because they are limited to 10% (by law) in admin expeditures. Case in point is 2008, many STOs saw decreases in donations.

    On one end of the spectrum, an STO can spend as little fixed costs as possible and simply make sure their variable costs go no further than 10%.

    On the other end of the spectrum , an STO can gamble and become the Amazon.com of STOs and automate everything.

    Reality is that all STOs are somewhere in between…and it’s impossible to automate *everything*.

  13. David Safier

    Kinda Sorta, thank you so much for your input. I’ll pass on your kind offer to set up an STO. First, I don’t believe in them, and second, I’m not the businessman type. But if I change my mind, I’ll know who to call.

    More seriously, though, can I tap into your expertise and ask some questions?

    You talk about capital expenditures running up costs, as a one time charge. That leads me to ask two questions. First, doesn’t that make the increase in processing expenses from $363,620 in 2006 to $426,895 in 2007 suspect? Second, if I were to go to a new company for processing services, I wouldn’t take kindly to paying far more than the going market rate to help that company get started. I would expect the company to charge something similar to the going rate and take losses for a few years until it covers its initial costs. Is ACSTO subsidizing HY Processing by covering its startup costs?

    I understand about the evaluation process and how the time spent looking over applications can drive up employee costs. But my understanding is that there is no means test for scholarships coming from personal tax credits (though there is for corporate tax credits), which could make means testing by looking through tax returns less critical. Also, I have heard from an ACSTO employee that as many as 80% of the tax credit donations to ACSTO contain recommendations for who the scholarships should go to. The same employee told me most of the recommendations are honored. That again would cut down on the costs of evaluation. Finally, “evaluation costs” don’t explain why ACSTO’s costs are so much higher than other STOs. Are they more diligent?

    You may not want to make a judgement call, but if you do, in your professional opinion, do the processing expenses for ACSTO appear to be valid or higher than what you would expect?

    I’m asking serious questions, from a nonprofessional who is using powers of logic combined with the smell test to a professional who brings expertise to the table. I would be grateful to get your honest answers.

  14. Kinda Sorta

    The statement below is almost accurate.

    Full disclosure: I’m a technical consultant and I help out a few school tuition organizations (STO).

    Capital expenditures can run up costs, especially for automation…but this is one time only charges.

    Data processing can mean many things. On one spectrum you have simple data-entry. And on the other you have data-entry + a verification process for accuracy (which may need human judgement) + complex scholarship applicant evaluations.

    Depending on the STO, scholarship applicant evaluations can be quite time consuming – due diligence is required for the serious STO.

    An example would be the tax returns that STOs look at during the evaluation process. Not all tax returns are equal. Human judgement is sometimes required to filter thru the returns to make sure the money is going to a truly needy applicant.

    Now, I’m not justifying Mr Yarbrough’s ethics, but rather slowing down our rush to judgement.

    Besides, if one thinks that running an STO is as easy as setting up a data processing system, why doesn’t one start an STO and make some $$?….I can be your technical consultant 🙂

    With data processing, there are obvious economies of scale. Once you’ve set up a system to process $5 million, it doesn’t cost twice as much, let alone 15 times as much, to process $10 million. The cost per dollar should go down, not up.

  15. Great story David, are the HY employees all family members a la Michale Steele?

  16. David Safier

    Great question, Todd. According to one newspaper report this morning, Yarbrough says HY has about 12 employees. I want to know if they have other clients, but I also want to know how they stay $400,000 worth of busy processing information for ACSTO.

  17. Great work on this Dave. I was wonder does HY Processing have any other clients than the singl STO?

  18. This sounds like typical fraud and shenanigans.

    Tony Soprano showed how you do it several times during the series, most pertinently during the HUD Loan story arc.

    This REALLY deserves serious investigation. However, cynical bastard that I am, I expect that the IOKIYAR rule will win out, and Yarborough will walk.

    As the old saying goes ” Conflict of interest? What conflict of interest…our interests mesh perfectly!”

  19. Jack the Griper

    This is the part of the movie in Pulp Fiction where they recite that verse right?
    Man, please do not let this go!