A professional chimes in on Yarbrough’s STO

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by David Safier
Before I go into the substance of this post, let me mention an excellent post on Random Musings that adds to the discussion of Yarbrough's ACSTO paying about $400,000 a year to Yarbrough's HY Processing. "Random" quotes from the IRS rules governing 501(c)3 organizations, particularly the prohibition against "excess benefit transactions" where the money paid by a 501(c)3 organization exceeds the value of the benefit provided. A very interesting read.

As often happens here at BfA, a commenter has added information and analysis to the discussion at hand. "Kinda Sorta" (that's the commenter's name) writes, "I'm a technical consultant and I help out a few school tuition organizations (STO)." His comment is neither intended to bury Yarbrough, nor to praise him. He just wants to make sure there's enough light shed on the subject, not just heat.

Let me quote from Kinda's comments, then make add some comments I made after his. From Kinda, referring to the high charges by HY Processing to ACSTO:

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

I agree, startup costs can be huge. But that leads me to ask two questions. First, if it's one time startup costs that led to the high charges, why did the processing expenses increase from $363,620 in 2006 to $426,895 in 2007? There should have been a dropoff, not an increase. Second, you don't charge your clients more than the going rate to cover your startup costs, or you'll never get any clients (unless the client and company happen to be the same person). You charge market rates and recoup your startup costs over the first few years, if you're successful.

From Kinda, about the costs HY Processing might incur:

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.

This again brings up lots of questions.

  1. Does HY Processing go through the scholarship applications or does ACSTO? That's not clear on the tax return.
  2. Why would ACSTO spend substantially more on evaluation than other STOs?
  3. This is something I may write about at length later, because it's one of the truly vile aspects of the personal private school tax credit legislation. People who give tax credit donations to STOs can "recommend" the child they want to get that scholarship, so long as it's not their child. Think what that means: Mr. and Mrs. Jones recommend their money goes to Sally Smith, while Mr. and Mrs. Smith recommend their money goes to Johnny Jones. Then think about all the aunts and uncles, grandparents, friends — you get the picture. And these scholarships aren't means tested, meaning a millionaire's kid can get a scholarship. I spoke awhile ago to an employee of Yarbrough's ACSTO, who told me, about 80% of the donations come with recommendations. "How often do you honor the recommendations?" I asked. The reply was, almost always, unless problems arise. So, if nearly 80% of the donations go to predesignated children and there's no means testing to worry about, that makes the evaluation process reasonably easy and inexpensive.

I hope Kinda Sorta replies to my questions. As Kinda says in the comment, "I'm not justifying Mr Yarbrough's ethics, but rather slowing down our rush to judgement." That's what honest, collaborative discussion is all about — tossing around facts and ideas and challenging one another in the interest of arriving at the best possible answer. If my questions about Yarbrough's ethics turn out to be misplaced, I will gladly and vocally withdraw them. This isn't a witch hunt, it's an attempt to find out what's going on. The best source, of course, is Yarbrough himself, but somehow I don't think he'll explain himself without being forced to.

While we're at it, I hope Random Musings collaborates as well (Random, meet Kinda. Kinda, Random.), not to mention the regulars on BfA and anyone else who wants to join in. That's one of the great things about blogs and the web when they're used productively. Many minds can come together. May the best ideas and analysis win.

EMAIL ME: If you want to add information to this story but don't want to use the Comments section, feel free to email me.