By Aoife Kane, Emily Mosier, & MacKenzie Miller
The nonprofit Arizona Leadership Foundation (ALF) has awarded over $280 million in private school scholarships for thousands of students across the state between 2011 and 2023. During that same time, ALF has paid at least $17 million to for-profit companies owned by CEO Aaron Muth and his wife, Ariana Muth. The payments, for contracted work for ALF, are documented in more than a decade of federal Form 990 tax-exempt filings through 2023.
The IRS asks nonprofit organizations whether they regularly and consistently enforce compliance with a conflict of interest policy. ALF has marked “No” in every 990 it has filed, according to a review by Cronkite News and The Beam, a new accountability newsroom from the Howard Center for Investigative Journalism at Arizona State University.
“Form 990 responses can sometimes reflect how questions are interpreted rather than the full scope of governance practices,” Aaron Muth said. “In practice, ALF applies these policies with board oversight to ensure accountability.”
In Arizona, tens of thousands of families rely on private school scholarships from a type of nonprofit called Student Tuition Organizations (STOs). ALF is one of the largest in the state. Individuals and corporations donate to these charities in return for dollar-for-dollar tax credits, allowing donors to redirect their state income tax to STOs instead of the state’s general fund, according to the Arizona Department of Revenue.
ALF is a family-managed nonprofit based in Scottsdale that relies solely on corporate donations and accounted for 20% of all scholarship dollars awarded by STOs last fiscal year. The Howard Center for Investigative Journalism reviewed over 100 federal Form 990 tax filings to the IRS by STOs from 2011 to 2024 and found that multiple STOs have a long history of paying for services from board members or their businesses.
- The Arizona Leadership Foundation has paid millions to companies owned by the Muths for fundraising and application processing.
- Arizona Tuition Connection (ATC)’s board president Tim Kuhn has received hundreds of thousands of dollars in payments for services like advertising and “integrity training.”
- The Arizona Christian School Tuition Organization (ACSTO) has paid millions for a wide range of services from a company owned by its executive director, Steve Yarbrough.
- Academic Opportunity of Arizona (AOA) contracts with a business owned by CEO Chad Bays and has paid over $100,000 for fundraising and consulting services.
When a nonprofit hires a vendor with conflicts of interest, the choice must be justified and fair market value must be considered, said Ellis Carter, an Arizona-based attorney representing nonprofits.
“There better be a burning reason that you’re choosing the conflicted transaction instead of one that’s a non-conflict transaction, and not just for legal reasons, but also just because it doesn’t look good,” she said.
“Vendor relationships and key decisions are subject to board oversight and are documented consistent with organizational governance practices,” ALF’s Aaron Muth said. “We maintain appropriate records and are committed to transparency within the scope of nonprofit governance.”
When asked to share documentation on how these vendors are selected, Muth declined.
Neither the state Department of Revenue nor the IRS require STOs to report detailed vendor information. Muth declined to answer how much he and his family have personally benefited from ALF’s contracts with his private companies, Muth Strategy Group and Ocotillo Processing.
“I do not receive compensation from ALF. Any compensation related to separate businesses reflects private business matters,” Muth said in an email. “From ALF’s perspective, all vendor compensation is tied to services rendered, aligned with market standards, and subject to disclosure, recusal, and board oversight to ensure decisions are made in the best interest of the organization.”
“There better be a burning reason that you’re choosing the conflicted transaction instead of one that’s a non-conflict transaction, and not just for legal reasons, but also just because it doesn’t look good.”
Ellis Carter, a nonprofit attorney based in Arizona
Since 1998, STO nonprofits in Arizona have awarded more than $2.5 billion in scholarships to students for private school tuition. Many STOs focus on providing scholarships for students from low-income families or with disabilities.
Muth declined to answer how much of the money that his nonprofit paid to his companies – for example, $3.17 million in 2023 – became compensation for him and his family. When asked how many employees his companies have, he said that “vendors determine their own staffing structures.”
“The cumulative figure reflects more than a decade of contracted services that supported the growth, operations and scale of the organization,” Muth said, adding Muth said that ALF maintains the lowest overhead of any prominent STO in Arizona.
The Department of Revenue aggregates data by scholarship type and does not provide one overall ranking. ALF consistently maintains high scholarship to donation ratios for the two scholarship types it provides, Disabled/Displaced and Low-Income Corporate.
Currently, there are 63 STOs operating in Arizona, and they are required to allocate 90% of donations they receive to scholarships. ALF follows this rule. Carter said she thinks that because there is a cap of 10% for administrative costs, a layer of protection exists for the taxpayer.
The IRS asks tax-exempt organizations like ALF if they have a written conflict of interest policy, which ALF does. The policies include steps such as interested members recusing themselves from voting on relevant decisions. According to IRS rule 4958, “excess benefit transactions” happen when a person with influence over the nonprofit receives an economic benefit that exceeds the value the organization gets in return.
In 2023, Arizona Leadership Foundation paid $1.92 million to the for-profit company owned by the organization’s CEO, Aaron Muth. (Source: ALF 2023 Form 990)
“You’re supposed to leave the room and then have the disinterested people make a decision,” Carter said. If a tax-exempt organization is paying more than market equivalents to a vendor with a conflict, they leave themselves vulnerable to an IRS audit, she added.
ALF was founded in 2011, the same year Muth Strategy Group was formed. The private company is owned by the trust of Muth and his wife – ALF’s vice president. According to the Form 990s, there are several years when Muth Strategy Group raised 100% of the nonprofit’s annual donations from corporations. This was the case in 2023, when ALF scholarships amounted to more than $47 million. Ocotillo Processing, which is also owned by Aaron Muth, was founded in 2014 and processes applications for ALF.
After 2023, Muth Strategy Group was no longer contracted by ALF, according to Aaron Muth, who declined to clarify the specific reason why or whether another fundraising company has taken its place.
Muth does not receive a salary from his nonprofit. His wife and her father, Richard Kirsch – ALF’s chief financial officer – received salaries of $41,928 and $91,927 respectively in 2023. Ariana Muth declined to comment. Kirsch did not respond by deadline to a request for comment.
Muth Strategy Group provided strategic communications, outreach and fundraising support. Aaron Muth said that keeping fundraising and application processing separate from ALF keeps costs down.
“For much of ALF’s history, demand for corporate tax credits exceeded available capacity, with caps reached very quickly,” he said in an email. “In that environment, maintaining a large internal fundraising team would not have been an efficient use of resources. Our model reflects a disciplined approach to aligning costs with actual program demand.”
“I do not receive compensation from ALF. Any compensation related to separate businesses reflects private business matters.”
Aaron Muth, CEO, Arizona Leadership Foundation
“There’s nothing wrong with making money,” said Linda Parsons, a professor of accounting at the University of Alabama. “But it looks like there may be an element of, ‘This is a great thing, and I’m going to help everywhere I can, and also, this is an opportunity to make some money.’”
Parsons noted that while she has not seen another nonprofit set up their fundraising arm as a separate organization, “it could just be the most convenient way to do it.”
She also said that without seeing the company’s private financial records, there is no way of understanding what other expenses exist that may justify the cost – and even if Muth Strategy Group was paying high salaries to its employees, that would still not necessarily be problematic.
“It’s frustrating because these are not just charities,” said Carter, the nonprofit attorney. “They’re also benefiting from Arizona state tax credits, which significantly reduce the money going into the general fund, so it’s frustrating not to have that transparency.”
The largest STOs operating in the state paid outside vendors about $5 million for a variety of services in fiscal 2023, which is the most recent year that each STO has filed a federal Form 990. Over 60% of that total – $3.17 million – was paid by ALF to Muth Strategy Group and Ocotillo Processing.
The Arizona Christian School Tuition Organization, the state’s oldest STO, accounted for another large portion of that total, allocating $1.2 million to a company called HY Processing. Former Arizona state Sen. Steve Yarbrough is president of ACSTO’s board of directors and an owner of HY Processing LLC.
ALF paid 6.5% of their revenue for application processing, scholarship administration, strategic communications and fundraising. Comparatively, ACSTO paid 2.6% of their revenue for those same services in addition to office space, telephone operators, computers and equipment, data entry, customer service for donors and scholarship applicants, in-house IT services, accounting, legal, insurance and document preparation.
“ACSTO’s Board of Directors has a conflict of interest policy that is applied to a major vendor selection like this one,” Yarbrough said in an email. “The fully informed decision to contract with HY Processing was a decision made by them years ago and it has been reconfirmed multiple times since then.”
The Arizona Department of Revenue requires audits and annual reports from STOs, which include monitoring scholarship and donation amounts, but there does not appear to be any monitoring of vendor selection, compensation or business transactions with related parties.
“If we find them in violation of a statutory requirement, there is a process that allows STOs to correct the violation within 90 days, otherwise the STOs will lose their certification to accept tax credit donations,” said Rebecca Wilder, the department’s communication director, in an email.
Arizona Tuition Connection is the fifth biggest STO in the state in cumulative donations – and contracts with its board president for services.
ATC routinely visits private schools across the state to hold informational sessions for families on how to optimize scholarships. At these sessions, parents are encouraged to ask for donations in their child’s name from community members like their accountant, doctor or realtor. ATC is one of several STOs that provides customized brochures, with their child’s photo on it, to parents to pass out to possible donors.
ATC’s president of the board, Tim Kuhn, also runs AZ Tax Credit Funds, advising clients on making tax credit donations. The STO paid Kuhn $100,000 for advertising each year from 2018 to 2023 in addition to his salary from ATC. Kuhn also received $250,000 for “integrity training” in 2018 and payments for “rent” over several years, according to 990 filings.
Kuhn did not respond to multiple requests for comment.
Academic Opportunity of Arizona (AOA) is a STO led by CEO Chad Bays. AOA contracted with Desertsun Fundraising LLC, a company owned by Bays, in fiscal 2022 and 2023. The company was paid $73,875 in 2022 for fundraising half a million dollars; and was paid $98,500 for “strategic planning services” in 2023, according to 990 disclosures.
Bays said that AOA hires a nonprofit CPA firm to provide guidance and compliance, and uses a third-party compensation analysis to advise on employee compensation. He also said he does not vote in board decisions concerning potential conflicts of interest.
Over 100,000 students in the state use either STOs or the Empowerment Scholarship Account (ESA) program to pay for public school alternatives. School choice programs are policies that allow public money to fund non-public education options like private school or homeschooling. Arizona’s public school system is often ranked as one of the nation’s worst for public funding.
“Arizona has always been a leader” in school choice, said Stephen Shadegg, state director of Americans For Prosperity Arizona. “If you go back to our state’s history and the leaders we’ve had in this state, we are always on the forefront of pressing new boundaries and expanding freedom for individuals.”
While STOs are nonprofits that use donations to pay private schools directly to solely cover tuition costs, ESA dollars are distributed to parent-run accounts and come from the state’s public education funds, which reduces the amount of funding public schools receive.
Recent reports of fraud and misspending within the ESA program have found that parents purchased items like lingerie and diamond rings with public money. While the ESA program – which became universal in 2022 and now includes over 100,000 students – costs the state around $1 billion a year, STOs have diverted about $3 billion from the state tax fund since 1998.
Rodrigo Palacios is a public school teacher in Tempe and a co-chair of a ballot initiative in November to implement an income-based cap on ESA vouchers. “The state has a mandate and it’s within our constitution to publicly fund education and it’s not done that in many, many, many years,” Palacios said.
In 2011, the U.S. Supreme Court case Arizona Christian School Tuition Organization v. Winn found that tax credit donations given to STOs were not the same as direct government spending, therefore they could be used to fund private and religious schools.
A 2009 East Valley Tribune investigation found that two-thirds of Arizona’s STOs did not follow the 10% limit on administrative costs; and that some private schools encouraged parents to make illegal quid pro quo arrangements, donating on behalf of each others’ kids.
These reports of misuse prompted stronger regulation and heightened transparency, resulting in the state Department of Revenue requirement for STOs to undergo annual audits since 2011.
Emily Hedegard contributed to this reporting.
This story was produced by students in the Howard Center for Investigative Journalism at Arizona State University’s Walter Cronkite School of Journalism and Mass Communication, an initiative of the Scripps Howard Foundation in honor of the late news industry executive and pioneer Roy W. Howard.
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