Charter schools now big business nationwide
PITTSBURGH – The early charter schools in Pennsylvania were largely the product of passionate parents or community groups, who sometimes planned their dream schools around the kitchen table.
But the picture has changed dramatically since the charter school law was passed in Pennsylvania in 1997, with an expansion of education management organizations that bring big money and clout into the picture.
While some of the early charter planners succeeded -- such as the Manchester Youth Development Center on the North Side, which then offered an after-school tutoring program and started the Manchester Academic Charter School -- many schools never materialized, with some planners saying it was harder than expected to come up with the necessary capital and expertise.
That was before so many businesses aimed at providing curriculum, management and facilities entered the scene, including organizations that don't just assist but help initiate support for a charter school.
Charter schools are public schools that have their own boards and are chartered by a local school district in the case of a bricks-and-mortar charter or by the state for a cyber charter. School districts pay a fee set by the state for their residents to attend.
Increasingly, locally elected school officials are finding their districts competing against charter schools allied with big organizations with big money and their own ideas for students.
"It's had a large impact on the growth of charter school reform," said Gary Miron, an education professor at Western Michigan University who studies charter schools.
GROWTH OF EMOs
The number of education management organizations has exploded on the national scene – for-profit groups growing from five in 1995-96 to 99 in 2010-11 and nonprofit organizations growing from 48 in 1998 to 197 in 2010-11 – according to the National Education Policy Center at the University of Colorado Boulder.
That report showed that 35 percent of all public charter schools in the nation were operated by education management organizations -- both for-profit and nonprofit -- enrolling 42 percent of the nation's charter school students.
"Within a couple of years, we're going to see the EMO sector account for more than half of the nation's public charter school students," said Mr. Miron, one of the authors of the policy center's report.
Miron said charter school growth plateaued around 2001-02 but got a significant boost from education management organizations.
"There's only a certain number of people who are going to sit around a kitchen table to start a charter school," he said. "It was very complicated to run a school. Initially people thought anybody could open up a school, but eventually the stories came out about how difficult it was."
Ron Cowell, president of the Education Policy and Leadership Council and a state legislator when the charter school law was passed, said the Legislature didn't envision "this idea of a national outfit deciding that there's a business profit-making opportunity in Pennsylvania and they would come in and either help to establish a not-for-profit or find a not-for-profit."
But given a lack of capacity or expertise by some who would like to start a charter school, "I think it's reasonable that somebody else would be paid to do this management stuff," he said, but added that there are questions about whether the fees are reasonable and whether there is enough accountability and transparency at some charter schools.
As education management organizations grew, they began to play a major role in fostering growth of charter schools, including encouraging the formation of some cyber charter schools which attract thousands of students.
"What we are having now is private control of public schools," said Mr. Miron.
One of the goals of charter schools, of course, is to improve academic achievement. Though there are high-performing and low-performing schools in both categories, in overall comparisons of charter schools to each other, Mr. Miron said, "Every study that has looked at EMO v. non-EMO charter schools shows that the independent charter schools (overall) are performing better."
Traditional public school districts also rely on private vendors for certain materials and services, but they typically use a range of vendors, choosing, say, a reading program from one vendor and a math program from another after a lengthy public approval process.
School districts could hire education management organizations if certain legal requirements are met, including honoring union labor contracts, said Ira Weiss, a school solicitor whose clients include Pittsburgh Public Schools.
But he said that while school districts often hire outside firms to provide food service or transportation, "there's a huge amount of resistance to public school districts turning over core functions of education to the largely faceless corporate identities."
That in part reflects the realities of each type of school.
School districts are long-established, are used to handling many tasks in-house and have locally elected boards.
Charter schools are much newer and do not necessarily have in-house expertise. They are run by boards that are not publicly elected but usually are selected because they support a particular mission and sometimes a particular education management organization.
The state has 175 charter schools, including 16 cyber charter schools, according to Tim Eller, spokesman for the state Department of Education.
In 2011-12, 105,036 Pennsylvania students attended 167 charter schools. (Total enrollment figures aren't available yet for the current year.)
Charter school spending totaled more than $1 billion in 2010-11. Eight charter schools each spent more than $20 million that year, and some of the biggest spenders employ large education management organizations.
One such vendor is K12 Inc., a $708.4 million-a-year business serving more than 100,000 students a year in 32 states, including more than 2,000 school districts as well as charter schools.
K12 began in fall 2001 with 900 students in the Pennsylvania Virtual Charter School and the Colorado Virtual Academy.
Its biggest customer is in Pennsylvania, Agora Cyber Charter School, which has about 10,000 students and buys curriculum, technology and management services from K12.
Agora's IRS 990 form for 2010-11 lists $18.4 million in payments to K12.
K12's records show not just fees but all income, including pass-through payments it makes as a business agent, counting teacher salaries and benefits, as 13 percent of K12's total revenue in 2011-12 or $92 million.
K12 spokesman Jeff Kwitowski said K12 has spent millions developing its programs and provides services such as guaranteeing payments to employees even if the state or school district is slow in sending funds.
While charter schools cannot be chartered by for-profit businesses in Pennsylvania, for-profit businesses can play a key role in starting a charter school.
This was the case with Commonwealth Connections Academy, which opened in 2003 and always has contracted with an entity controlled by what now is known as Connections Education, headquartered in Baltimore.
Connections Education, which began as Connections Academy in 2001, now provides virtual education support to full-time virtual schools in 22 states, serving more than 40,000 students.
David N. Taylor of Conewago, Dauphin County, board president at Commonwealth Connections, said that when he was asked to join the first board, Connections Education already had been selected.
He said Connections Education was "instrumental in helping us get off the ground" because in the early stages some school districts withheld payments.
"Connections as our national vendor, our national partner, empowers us to do the really amazing things that we do," he said.
Taylor said he now is using his business connections to help Connections Education find a partner for a charter school in New Jersey.
Over the years, he said, Commonwealth Connections Academy (which now has about 7,000 students) has developed "administrative capacity and in-school leadership," which can enable Connections Education to focus on curriculum and technology.
According to its 2010-11 IRS filing, Commonwealth Connections paid $31 million – nearly two-thirds of its expenditures – to Connections Academy located in Baltimore for "school management services."
This includes not only fees but also payments for various purchases and pass-through payments. Mr. Taylor said he sees detailed reports from Connections Education and "can justify every nickel of taxpayer money we've spent."
Last year, Pearson acquired Connections Education for $400 million from an investor group led by Apollo Management LP.
Pearson is a major education player and owns textbook brands such as Scott Foresman, Prentice Hall and Addison-Wesley.
Miron said it's not unusual for an education management organization to be involved in the formation of a charter school.
"The EMO will do a market analysis and decide where they want to locate a charter school and then do an information meeting, invite parents in and from that group of parents who come in, they'll get some to sign up and they'll be on the initial board," he said.
The charter school board then will contract with the education management organization.
Former state Sen. Jeffrey Piccola, a Republican from Dauphin County who recently served as head of the Senate Education Committee, said he thinks, in general, education management organizations are needed. "I think many times when a charter got into trouble, it was because they didn't have the appropriate management."
He sees EMOs as adding "professionalism and a strong management ethic" so that funds spent on charters are not wasted.
SEPARATION FROM MANAGEMENT
Some schools separate from their management company as they mature.
Over the summer, Pennsylvania Distance Learning Charter School based in Franklin Park, which has 435 students, separated from White Hat. The Environmental Charter School at Frick Park, a bricks-and-mortar charter school in Regent Square with 554 students, left Imagine Schools, also over the summer.
"You need (the management organization) for your initial startup. They'll lay out the capital to get you started. Once you pay them back, you really don't need them anymore," said James Hoover, CEO of Pennsylvania Distance Learning Charter School, which had a contract with White Hat for five years.
Under the old contract, the school had to give White Hat 97 percent of its "qualified gross revenues less employment costs," resulting in $1.5 million of the school's total revenue of $3.6 million going to White Hat in 2010-11, according to an IRS filing.
When a management company is involved, it sometimes can be difficult to get information. Mr. Hoover said he knew "very little" about how White Hat spent the money.
As a publicly traded company, K12 releases certain data for investors, including the fact that former financial analyst Ronald Packard, who founded K12 in 2000, served as CEO at a salary of $618,942 for fiscal year 2012. His total compensation was $3.96 million.
MILLIONS SPENT ON EMOs
In Pennsylvania, the three charter schools that spent the most overall – all cyber charter schools – used education management organizations for at least some functions.
The schools and their total expenditure were Pennsylvania Cyber, $109.2 million; Agora Cyber, $66.9 million; and Commonwealth Connections, $51.1 million, according to state Education Department figures for 2010-11.
The biggest cyber charter school in the state – PA Cyber, with enrollment around 11,000 – relies on the National Network of Digital Schools Management Foundation, to which it paid $44 million in 2010-11 for various services such as management fees and curriculum. This nonprofit entity was formed in 2005 and once shared top executive and three of its board members with PA Cyber, which was founded in Beaver County.
Earlier this month, state Auditor General Jack Wagner criticized the school's contract with NNDS for management fees because it is based on 12 percent of the school's gross revenue rather than on the services provided.
On its website, NNDS lists schools in 14 states as using its curriculum, management services or both, including 71 districts, schools and intermediate units in Pennsylvania.
In addition to Agora, K12 reaches across a number of Pennsylvania schools. The list includes Pennsylvania Virtual Charter School, which had 3,414 students in fall last year and the Central Pennsylvania Digital Learning Foundation, which had 112 students in fall last year.
It also provided curriculum to the now-defunct Frontier Virtual Charter High School, which had 47 students in the fall last year and surrendered its charter following its first year after the state Education Department alleged serious academic and financial problems.
The K12 website also lists five school districts and one intermediate unit in Pennsylvania using its curriculum. K12 is part of two cyber charter school proposals in Pennsylvania and a Pittsburgh charter school as well.
While individuals still may put forth charter school proposals, there's no returning to the days of 1997.
"Things evolve," said Mr. Cowell. "We've got an Internet that wasn't so mature in 1997. We've got much more public demand for public school choices."
In Pennsylvania, there are efforts to pass legislation that would put charters under the same laws and regulations that apply to traditional districts and that aim to promote transparency and guard against conflicts of interest and ethical violations.
"I think charter schools are here to stay," said Mr. Cowell. "They ought to be part of the public school menu, but charter schools also should be required to operate under the same rules that other public schools operate by around accountability for student performance and accountability for the use of taxpayer money."