In my last post, I highlighted the tremendous risk – political, educational, and fiscal – of the new Texas ESA program. I’m a guy who focuses on risk (comes from decades of work in high-risk industries like construction, biotech, real estate, and insurance), and what I’ve learned the hard way is that the first step to managing risk is identifying it.
But risk identification is only the first step; the next, crucial step is risk mitigation. Talking about risk doesn’t reduce it; you have to take positive steps to manage risk.
Those positive steps are the subject of this post, a counter-balance to the negative tone of my previous one.
Let me be very clear: the Texas Legislature has handed the Comptroller a tough job. He has to create a new consumer product from scratch, introduce that product to a market of six million largely uninformed consumers with no experience using this product, and launch that product at the scale of $1 billion in the first year.
But as promised, I’ll keep it positive. Rather than rehash all of the potential problems facing this effort, I’d like to provide what I think is a reasonable roadmap of how to launch the Texas ESA program.
To do this, I’ll pretend that the Comptroller has named me Texas ESA Czar.
First Things First
What’s the first thing I would do? That’s easy.
Tell parents what is coming. Over and over and over again.
Some politicians, staff, lobbyists, and policy experts in Austin think everyone in the state knows about our great new school choice program. The reality is that almost no one does, and if this is not fixed first – and aggressively – we won’t be able to recover in time for a successful launch in the 2026-27 school year.
Let me state this again for complete clarity:
Only a very, very small number of Texas families know about ESAs, and unless they soon learn what it is and how it can be used, there’s no reason for them to apply and the program launch will be a failure.
This information gap has to be closed, and the only way to do that is with a concerted effort to reach, educate, and prepare parents for the ESA program.
And, as is often the case, the calendar is a challenge.
Parents considering a new private school for their kids begin working on it about a year in advance. Here’s an article that covers the basics:
August and September the year before, parents are already shopping, and application season begins in November. Many (if not most) schools have an admissions test, generally administered in January, and admissions decisions are made starting February and running until as late a June.
For parents who are applying to schools for the first time with funds from an ESA, this timeline means they need to start getting prepared this fall. But why enter the private school application process if you won’t get an ESA? And how do you even know to apply if you don’t know what an ESA is?
The good news is that SB2 anticipated this need. Sec 29.3535. allows the Comptroller to hire firms to “engage in marketing, advertising, and other activities to promote, market, and advertise the development and use of the program.”
So the Comptroller can hire marketing firms to get the word out to parents, preparing them for the coming of the new ESA program.
The bad news is that it appears the Comptroller is not going to do this. There has been no Notice of Upcoming Request for Proposals for promoting the program. Instead, it appears that the Comptroller is going to rely on Certified Education Assistance Organizations (CEAOs) to promote ESAs.
How do I know this? Since I don’t work for the Comptroller I don’t know for sure, but the Comptroller’s office has issued a Notice of Upcoming Request for Proposals for CEAOs, and the notice says that respondents must provide “an annual marketing plan” as part of their submission.
It therefore appears that the Comptroller plans to leave marketing of the program to CEAOs. This plan makes sense at a certain level, in that the CEAO (and it is highly likely there will be only one CEAO chosen given the structure of their notice) is getting paid to do everything needed to run the program, and the program needs to be promoted.
But the problem here is timing. As I laid out in my previous post, best-case scenario is a contract is signed with the CEAO soon enough for them to open an application portal by January 1. Even if the CEAO hits launches a marketing program this year, it will too late for the normal private school application cycle. If parents are really only learning about the program in December, they will not be prepared to apply to schools in time to win admission.
Again, this is fixable. The Comptroller can hire marketing firms in September when SB2 becomes effective, and begin to inform parents of what’s coming. And unlike selecting a CEAO (which is a very complex procurement effort), hiring marketing firms is pretty simple. And also unlike CEAOs, the Comptroller can spread the work around by hiring several specialist firms to handle each element of the promotional effort, whether by media type, geogrpahy, target demo, or some combination.
So if I was ESA Czar, I’d put out an RFP notice right now for promotion and marketing, and plan to hit the ground running on September 1.
Applications and the KISS Principle
The second thing I would do is focus on applications, and hire a firm that is dedicated to running the application process, and only that process.
At this time, based on the CEAO RFP Notice, the Comptroller appears to be considering hiring a single firm to provide both application and payment services. If true, I think this would be a mistake.
The application portal needs to be opened quickly. If the Comptroller runs the RFP process and selects an application CEAO in October, the winner would have time to open the portal by December if that’s all they were focused on doing.
To be sure, that is very fast (especially if parents know nothing about the program - see above).
Very fast, but doable if the application itself is simple. Really simple.
The operative principle here is KISS: Keep it Simple, Stupid.
In some states, applying for an ESA is a very involved process. Parents have to fill out an online application, and then upload documents to confirm things like household income, residency, child’s disability, etc.
If I was ESA Czar, I would do it differently. I would ask for basic information like name, address, email, and phone. I would ask for each child’s name and date of birth applying to the program. Parents also have to provide the size of their household.
I would then ask parents to make the following representations:
That this is the only application for each child. One of the biggest challenges in charter applications is parents submitting multiple applications for the same child.
Whether their household income is less than 200% of the Federal Poverty Limit, between 200-500% of FPL, or greater than 500% of FPL. When parents enter household size, the 200% FPL and 500% FPL numbers will be displayed for reference.
Which, if any, of their children has a disability as defined by SB2 (which relies on a definition Section 20.003 of the Texas Education Code). The definition is displayed for reference.
At the bottom of the representations, in big, bold letters, it says:
ALL INFORMATION PROVIDED WILL BE CONFIRMED PRIOR TO AWARD OF AN ESA. INACCURATE INFORMATION CAN LEAD TO DISQUALIFICATION OF APPLICANTS AND LOSS OF FUTURE ELIGIBILITY IN THE PROGRAM. PLEASE CONFIRM THAT ALL INFORMATION IS CORRECT BEFORE SUBMITTING YOUR APPLICATION, PARTICULARLY YOUR CHILD’S NAME AND DATE OF BIRTH.
I’d then place a check box below this that says they understand this warning and consent to these terms, and that check box would have to be checked before the application can be submitted.
That’s it. No documents to upload, no prior verification required.
This information is all that is necessary to accept their application and place it in a priority list (determined by lottery).
If a child are prioritized high enough to be selected for an ESA, parents will be notified and they will have a period in which to upload confirmatory documents. Once that’s done and their child is admitted to the program, information is passed on the the account administrator (a different CEAO) and the account is set up.
So if I was ESA Czar I’d hire a single CEAO to run the application process, and I’d make the application itself dead simple, relying on verification post-selection rather than during the application process.
You’re Gonna Need a Bigger Card
This brings me to the final item that must be addressed: the flow of money.
I’ve posted before on how I believe the ESA program payment system should work. The state should issue ESA families a card for each kid’s account, to be used only for allowable education expenses. Like an HSA (Health Savings Account) debit card or an EBT (food stamp) card like the Lone Star Card, card issuers and vendors are responsible for assuring that charges are validated at the point and time of purchase.
I believe this approach is the only practical way the Texas ESA can work at its intended scale, since SB2 prohibits disbursing cash to or reimbursing parents:
Given other state’s problems with reimbursement-based ESA payment systems, this was the right decision by the legislature. Here’s why:
Everyone talks about an ESA like it’s some kind of savings account to support parents paying for private school. But that’s not correct. An ESA is not for parents; it’s for children. Despite what some libertarians might wish, ESAs are not a gateway drug for a Universal Basic Income program.
The right way to think about an ESA is as an education trust fund. Trust funds to pay for a child’s education is not just for rich families; indeed, SB2 makes every kid in the State of Texas eligible to become a trust fund kid.
But the parent is the trustee, not the beneficiary. The beneficiary is the child. And that means the money is controlled by the parent, but it’s not the parents’ money.
In general, it’s a bad practice for money distributed from a trust to flow through the trustee’s personal bank account. The trustee is supposed to have only the beneficiary’s interest in mind, but if they’re in the stream of commerce between the trust and the recipient of the funds, the trustee could find themselves with a conflict of interest.
SB2 therefore draws a sharp red line between the state’s funds and the parents’ balance sheet. Money will flow directly from the state to vendors, and is prohibited from flowing through parents personal accounts.
This prohibition means that there’s only two ways for Texas ESA payments to work:
CEAOs can create their own proprietary procurement portals, where parents have to go to pay tuition, fees, purchase books, instructional materials, curriculum, assessments, transportation, tutoring services, or any of the other expenses allowed under SB2.
CEAOs use existing closed-loop (e.g. SNAP) or open-loop (e.g HSA) payment systems to process payment. To do this, the Comptroller will have to develop a set of rules that allow a card issuer to instantly determine whether a payment is legit. If it is, the payment is approved the vendor is paid. If it’s not, the payment is declined and the parent is notified (like when you credit card is declined at a restaurant).
Both of these approaches will be challenging to set up in the 6 months or so between selection of a payment CEAO and the flow of funds, but in my opinion the second option is the only one that has a chance to smoothly launch and scale to $1 billion dollars in the first year.
This system would require that rules be written which allow payment processors to “pre-adjudicate” (approve or decline) transactions when a card is used. That sounds pretty challenging, but it’s what happens already in the HSA-FSA health insurance industry at a scale of more than $100 billion in annual spend.
Moreover, we live in a period of rapid progress in AI and big data systems, and I believe it will be easier to set up rules that allows the use of already-existing infrastructure than it will be to bring thousands of vendors into a closed, proprietary marketplace.
So, if I was ESA Czar, the third thing I would do is engage with the large scale payments industry and develop a plan to create a card-based account system that uses AI and existing payment rails. I would embrace the trust fund model, and establish rules for the use of merchant category codes and UPC pre-adjudication that would allow parents to purchase allowable goods and services as a trustee for the benefit of their children’s education with no conflict of interest.
That’s it. In summary, if I was Texas ESA Czar, I’d engage in the following order of battle:
Hire several marketing firms asap to develop messaging and communication programs to inform parents in a timely way about the new Texas ESA program.
I would run an RFP process for a dedicated application CEAO, and require them to stand up an application portal that is simple, simple, simple and does post-selection verification.
I would run a separate RFP process for account management and payment processing that is built on existing closed-loop or open-loop payment systems already operating at scale.
All that being said, I’m not the Czar.
Heck, I’m not even Russian.
But I am named Leo, and I own a fur hat, so I guess that’s something…