For-profit providers: Wall Street wants your kids

Your public schools are failing and your children aren’t learning. The school system is choked by bureaucracy and over-regulation and it is being held hostage by teacher unions that won’t respond to parents’ concerns nor adopt meaningful reforms. Principals are weak and refuse to fire teachers who underperform. The public schools are overcrowded and in disrepair and state and local municipalities are broke and cannot afford the cost of curriculum, books, and repairs to the infrastructure of schools, not to mention the personnel, supplies and technology needed to educate students. What can be done? Privatize the management of schools, says the burgeoning educational industry; only a huge, vibrant and creative private sector can fix what is ailing schools, parents and their children.

 

From the perspective of the private sector, success in education is based not on compliance with government regulations or mandates, nor by public bureaucrats seeking reforms but by developing the best ‘educational product’ and attracting the most ‘customers’. The clarion call is concise, the paradigm shift resonant and clear: reform education through market based competition and in the case of public schools, most notably charter schools, allow private, for-profit management companies to run them. In return, all that is asked by the for-profit companies that increasingly operate many public charter schools throughout the nation is a chance to make a decent profit, a chance to bring in a return for their investors. But is the shift from public management of public schools to a private management of public schools a profound and troubling movement away from public education and public schools to increasingly private education and for-profit managed schools? If so, can parents, their children and educational stakeholders really rely on a theory that advances bottom line profits, returns on investment for company shareholders and investment venture capital as the way to go about ‘fixing schools’? Or is the increasing shift from public management of public schools to the for-profit management of public schools a worthy and long awaited reform?

 

Some History
School privatization was born in the era of Reagan economics (what is also called neo-liberal economics), following efforts to deregulated and to privatize every other sector of the economy, notably health care, prisons, hospitals, military services, ambulance services, communications, and transportation and the list could go on. In their heated rhetoric proponents of the for-profit, privatization of education constantly referred to schools as failed government-run programs or bureaucratic ‘monopolies’. The rhetoric was biting and clothed in free market jargon dutifully disseminated by the corporate media. Privatization, said the free market proponents of educational reform, would finally work to break the ball and chain of that public educational monopoly by introducing competition into the marketplace, all to the betterment of schools. Overnight groups of educational entrepreneurs arose arguing that they and only they would be able to beat back the educational competition that would mushroom by unleashing the private sector, deregulating educational policy and thereby cutting bureaucratic waste while delivering better results in the classroom and making a tidy profit for their shareholders.
Opponents of the idea of private for-profit management companies running public schools for profit vehemently argued that the idea offered a dangerous proposition, one that would serve to ultimately destroy education by reducing educational services to mere commodities to be bought and sold in the marketplace, thereby putting profits before people, in this case students. Long time educational activist, Ted Sizer, laconically stated opponents’ major objection when he noted:
It puts the investor at the head of the list. The children should be at the head of the list (Frontline, Frequently Asked Questions, John Tulenko, http://www.pbs.org/wgbh/pages/frontline/shows/edison/etc/faqs.html
Opponents to the idea also worried that in their search to maximize profits companies would look to cut corners on student instruction, amongst other things by hiring school teachers at lower pay than comparative union contracts, in order to increase their profit margins. Some educators also argued that private companies would serve to siphon off thousands of the best students from public schools who would be led to flock to the new for-profit managed schools, leaving the public schools to shoulder the burden of educating more expensive “special needs” children, or ‘the rest of the children’. Other opponents of the idea felt the whole notion of competition in public education was fundamentally unfair and actually antithetical to the values of collaboration, citizenship and equity in education.
The opportunity for the development of the ‘educational entrepreneur’ was escalating in the 1980’s and responding to widespread calls in the late 1980s for broad educational reforms in face of deteriorating urban school systems, media entrepreneur Christopher Whittle and businessman John Golle offered for-profit school plans to redesign U.S. schools. In May 1991 Whittle announced the formation of the Edison Project, a plan for a multibillion-dollar educational retail chain of 150 to 200 private schools, which, he declared, would provide better instruction at lower per-pupil cost than public schools. The idea was to replace the public school management of schools with that of the private sector. A year later, Whittle hired Benno C. Schmidt, Jr., president of Yale University, to head the Edison project. After failing to raise sufficient capital, the project was scaled back, focusing instead on obtaining management contracts with existing schools or winning public funds to establish new schools. In March 1994 Massachusetts became the first state to award charters for the project to operate schools. In the interim, Golle started Education Alternatives, Inc. (EAI), in 1986. His first schools, which opened in 1987, did not make money, so he turned to managing public schools. Following mixed results in Miami, Florida, and Duluth, Minnesota, EAI obtained a $133 million contract to operate nine public inner-city schools in Baltimore, Maryland.
Edison Schools, Inc., flush with new capital, opened four schools in August 1995. By 2000 the company could boast that they taught 38,000 enrolled students and ran seventy-nine schools in sixteen states and the District of Columbia. Edison’s contracts, which paid it approximately $5,500 per student, were paid by diverting money previously earmarked for the school districts or for charter schools. Although the company boasted of improved test scores, it was losing tens of millions of dollars. Some analysts estimated it would reach profitability if it grew to three hundred schools. On September 12, 2003 Edison Schools Inc. reported the first quarterly profit in its 11-year history of managing public schools.
As of 2008, the company changed its name to EdisonLearning. The company’s web site notes that:
In the 2008-2009 school year, Edison Learning will serve over 350,000 students in 24 states and the United Kingdom, through 120 school partnerships and in programs that are provided in hundreds of additional buildings.

Take Academica, the for-profit firm that manages 30 charter schools in Florida and makes money by charging public schools a management fee. Academica president, Fernando Zuelueta, says his company does everything from designing schools to hiring teachers to maintaining records. In an interview with National Public Radio, Zulueta, commenting on the role of non-profits in managing schools, was quite candid in noting:
You don’t want your principal spending his or her time doing this kind of work. You want them focusing on ensuring that the students are getting the best education possible (NPR Radio, Nightly Business Report http://www.pbs.org/nbr/site/onair/transcripts/080213c/ February 13, 2008.
The trend towards for-profit management of schools has been growing and across the country, communities are considering and in the process of turning over their public schools to private businesses. Businesses, always ready to seize an opportunity, especially in a market as potentially lucrative as public education, have been quick to respond. A number of management companies are investing in the business of schooling, and the concept that many of these companies have invested in is the for-profit charter school.
Companies find the charter school formula attractive: a steady flow of public money combined with exemptions from costly government regulations and school board requirements such as collective bargaining. In exchange for this funding and freedom, charter schools are expected to fulfill the terms of their charters, which usually have to do with improving student test scores over a fixed number of years.
K12, Inc. is a for-profit charter school company based in Virginia. The company operates, among other things, the Ohio Virtual Academy (OVA) in Ohio. OVA is a virtual, online charter school that enrolled 3,408 students in the 2006-2007 school year. In early December of 2007, K12, Inc. held an initial public offering of its stock. Even though only 63% of its hoped for $172.5 million was raised, the Washington Post reported K12’s share price rose 36%. The company has operated the Ohio Virtual Academy since the 2002-2003 school year and currently enrolls 3,408 students in Ohio and over 27,000 in its combined schools for-profit operation (Columbus Education Association blog http://blog.ceaohio.org/wordpress/index.php/2007/12/17/ipo-for-ohio-virtual-charter-school-operator-falls-short/).
Taking Stock in our Children’s Education

 
You might think to yourself: ‘Stock in our children’s education?’ The answer has been and continues to be a resounding ‘yes’. From for- profit prisons to for-profit charter schools the public policy privatization efforts of the educational industry continue to proceed virtually unbridled, and as we shall see, too often outside the regular channels of public purview. Why the rush to privatize for profit management of charter schools? The answer is simple. Education is now big business where more and more investors seek a return on their investment.
According to the Columbus Educational Association out of Ohio, OVA enrolled 3,408 in the 2006-2007 school year. Eighty eight percent of its students were white (versus 28.4% for CCS), 8.0% were African-American (versus 62% for CCS), 42.7% were economically disadvantaged (versus 73.3% for CCS), no students were listed as Limited English Proficient (versus 7.7% for CCS) and 6.7% of students were classified as having disabilities (versus 15.6% for CCS). Yet state data gathered on the school indicates that the school spends 33% less per student than the state average (http://www.greatschools.net/cgi-bin/oh/district_profile/936?schoolId=5039). Furthermore, records show OVA paid its 91 Ohio teachers an average of $32,341, according to the Ohio Department of Education’s website. And although the company made about $108 million from the initial public offering (IPO), it continues to pay its 91 non-unionized teachers an average of $32,341 (ibid).
Ohio is hardly the only state that allows for the for-profit management of charter schools. More and more cash strapped states and municipalities are bending over backwards to usher in an era of for- profit charter schools. Many of these government agencies simply cannot keep pace with rising economic costs for school infrastructure and falling tax revenues to pay for them. One case and example is the Imagine International Academy.
In November of 2008, the Texas Education Agency approved the opening of a McKinney charter school run by a company that other states rejected over concern about its tax status. The Texas board of education allowed the for-profit Imagine International Academy of North Texas (the headquarters of the company are located in Arlington, Virginia) to run the school even though state law allows only nonprofit organizations to open state-funded charter schools. Imagine argued that it would use the nonprofit status of an affiliate charter school in Indiana.
According to the Dallas Morning News out of Texas, Imagine intended to open 15 schools in Florida but the company met heavy resistance from local and state education officials, and withdrew its applications. Florida education leaders questioned whether Imagine was a certified nonprofit or a business attempting to profit from public education money. The company has opened dozens of schools in 13 states (Haag, Matthew, November 27, 2008 Dallas Morning News http://www.dallasnews.com/sharedcontent/dws/news/localnews/stories/DN-imagine_27met.ART0.Central.Edition1.4a64ad0.html Texas Doesn’t Heed Charter School Rule in McKinney). However, school officials in Florida and Nevada have raised questions about other Imagine schools, saying they have not proved they are nonprofit and that public money should not flow into for-profit hands. According to Tina Pinkoson, chairwoman of Florida’s Alachua County Public schools:
They do not have a 501c3. They say they can prove it, but we won’t believe it until they show us (ibid)
Non-profit or for-profit what all this means is that Imagine Schools Inc. would receive 12.5 percent of the Texas per-pupil state funding, which is about $750,000 from each of its Texas schools, according to the TEA (ibid). But that’s not all. The Texas charters, which Imagine would manage, would also pay Imagine Schools Inc. monthly ‘allowances’. Although the amount of the monthly ‘allowances’ have not been set in Texas, a cursory glance at the educational system in Alachua, Fla. has Imagine Schools Inc. proposing that they receive $3,000 a month for 20 years, plus, on top of all this, 1 percent to 3 percent of the charter’s revenue for up to 20 years. According to the charter application, in return, Imagine Schools Inc. promises to provide the two Texas charters everything from teachers to budgeting to human resources.
Perhaps the real issue was best summed up by Ms. Brady when she stated:
It’s hard to find a vendor to lease something or provide loans to a new charter school. It’s (the deal with Imagine) essentially a way for schools to tap into an existing company with a strong credit background (ibid).
Distilled down to basic and simple economics, cities and states simply do not have the revenues to provide capital improvements, buildings and a public education for an increasingly growing national student body. Companies like Advantage promise the government entities they contract with economic prosperity in the form of shared costs and services. But is this really the case?
For an idea of how the for profit arraignment works with public entities like school boards, one only has to look at Golden Door charter school in New Jersey and the economic arrangement they made with Advantage Schools, a for profit educational company.
At ‘Golden Door’ the door was really Golden


Golden Door Charter School in Jersey City, N.J. with the help of Mayor Bret Schundler, took advantage of the state’s charter-school legislation co-, and helped establish five charter schools in one of the nation’s most ethnically diverse cities. In collaboration with the mayor of New Jersey, Advantage Schools Inc. — a for-profit, education-management company founded in Boston 1n 1996 — implemented every detail of Golden Door’s curriculum and staffing in only six months. Golden Door is one of eight charter schools, serving a total of 4,500 students that Advantage has established in the past two years across the country.
Advantage’s says their goal is twofold: to improve student performance and at the same time make education a profitable venture. According to Theodore Rebarber a co-founder of the for profit management company:
We thought the for-profit culture would create the kind of discipline and focus on execution that nonprofit environments sometimes lack. It also works well with our commitment to expand. We want to have an impact on education, not just one or two schools (ibid).
In September of 1999, Golden Door moved into a new $8.75 million structure that Mayor Schundler financed with municipal-bond money. The public bond deal obviously saved Advantage millions on start-up costs, costs they would otherwise have had to bear as a private company by having the taxpayers foot the bill. To buttress his decision to ally with for profit management Advantage, the mayor points to a $30 million dollar public elementary school the city is currently building. The public elementary school will serve the same number of students in the same square footage as the new Golden Door School. And it comes as no surprise to many residents of New Jersey that the city’s mayor sat on Golden Door’s board when he made the deal. According to Business Week, Mayor Schundler made what the publication calls “a shrewd deal for the city”. Mayor Schundler rationalizes the decision by stating that:
The building is a community center with a daytime tenant, Golden Door. In the evenings and on weekends, local groups use the facility. Golden Door pays the principal and interest. We end up having a community center for free, as far as the local taxpayer is concerned (http://www.businessweek.com/bwdaily/dnflash/july1999/nf90722b.htm Business Week When the profit motive goes to school July 22, 1999 Patrick Jameson McCloskey

But that is not the whole deal: By state law, Golden Door gets only 90% of the $9,200 allocated per public-school pupil in Jersey City. Out of that amount, Advantage pays $1,500 per student in rent, which goes back to the municipality, and then pays salaries, benefits, and operating expenses for the school. According to the mayor’s office, this translates to a 40% reduction in the per-pupil cost to the taxpayer (ibid).

Wall Street Expectations: Leave no investor behind

The real question facing public policy experts and educational pundits is how can a company like Advantage run charter schools in some of the nation’s worst school districts for significantly less than regular public schools and still turn a profit? The answer can be found, as it can for any business, in the amount of costs they must incur relative to the income and revenues they bring in. What this means is simple: the for profit management companies that seek to run more and more charter schools have to balance perceived and real student needs against the driving engine of their corporations, investor expectations and profits — in essence against the bottom line. And there are certainly no shortages of investors. Several venture-capital firms — including Kleiner Perkins Caufield & Byers in Menlo Park, Calif. — together have bet $25 million on Advantage’s capacity to make a profit and keep costs down.

According to Gary Miron, writer and researcher in the charter school field:

Advantage has been less aggressive than others at going for profits. It provides busing and hot lunches. That helps them recruit students from all segments of the school district. Other companies are better at selecting less-costly students.

Rebarber, co-founder of Advantage, left no one wondering what Advantage’s bottom line is when in 1999 he commented:

Still, our costs have been what we predicted, and we are growing the central office at a reasonable pace. We’re on track to pay out investors a reasonable return within the next few years (ibid).

How lovely. And as for our nation’s children, where’s their golden handshake?

Dr. Danny is a public attorney and an educational writer. He has published several books including School Vouchers and Privatization, Charter Schools, 1st edition, and his new book, Charter School Movement: History, Politics, Policies, Economics & Effectiveness 2nd edition will be out in October of 2009.