In this follow-up to our 2021 report, we again focus on the world of charter schools run for profit, a world both hidden and misunderstood. We focus on how for-profit operators expanded their reach and enrollment during the Pandemic years so that one in every five charter school students attends a school controlled by a for-profit corporation.
We pull back the veil on tactics and practices designed to reap as many public dollars as possible from charter schools while hiding behind laws designed to keep profit-making hidden from the public’s eyes. We also explain in detail how both large and small for-profit companies evade state laws by using related entities and a nonprofit facade to reap maximum financial advantage. From sweetheart deals to sweeps contracts to real estate bonanzas, our report explains the inner workings of the world of charters that put profits, not children, first.
You can view and read the report by clicking the image below.
LittleSis map in the report
Arizona entrepreneur and charter school founder Raena Janes is the founder of Apex Schools, a for-profit EMO that manages nine schools that were also founded by Janes. The LittleSis map shows how not only Janes but also board members and employees of the schools have profited from contracts that include real estate, advertising, construction, transportation, and maintenance agreements. Since the 2010-11 school year, public documents show that Janes and her colleagues have extracted nearly $33 million taxpayer dollars from the charter schools.
Click on the image below to view the full, interactive LittleSis map.
Apex Schools: Designed to Enrich
In the Media
The Role Of Real Estate In The For-Profit Charter School Grift
It would be easy to assume that charter schools are in the education business, but in fact, many charter school companies appear to be in the real estate business instead.
In its new report, “Chartered for Profit II,” the Network for Public Education lays out the techniques for running a charter for profit, even if it is nominally non-profit, including the use of real estate deals.
To read the full story in the Bucks County Beacon, click here.
Report: Virtual Charter Schools Run For Profit Grew During Pandemic
The Network for Public Education has released a new report, Chartered For Profit II: Pandemic Profiteering, that looks at how charters run for profit fared during the previous pandemic years, including insights into how virtual charters, also known as cyber-schools, enjoyed a huge uptick in enrollment.
How can a charter be run for profit when virtually all states have outlawed for-profit charter schools? There are ways.
To read the full story in Forbes, click here.
Running a Charter School for Profit Should Be Illegal
From insider deals to real estate flips, the problems with charter schools run by for-profit corporations can’t be ignored. And growth in this sector is accelerating as operators use lax regulations and complicated corporate schemes to harvest public dollars from publicly-funded charter schools.
To read the Progressive, click here.
Some portions relevant to readers of this space.
During a 2016 visit to California, Network for Public Education (NPE) Executive Director Carol Burris met Michael Matsuda, the Superintendent of the Anaheim High School District. Matsuda showed her a flyer that advertised a new online Oklahoma-based charter school called Epic. The online school, which was actively recruiting students in his district, was giving enrollees $1,500 for a “personal learning fund,” along with free laptops, iPads, and Internet services.1 According to Woodward News, Epic, growing at a breakneck speed in Oklahoma, was also handing out free concert tickets, vacations, and other prizes for student referrals to its school, which had a four-year graduation rate of only 28 percent.2
Even as Epic was moving into California, it had been under investigation in Oklahoma for three years.3 While in theory, the school was run by a nonprofit called Community Strategies Inc., the real decision-maker was a for-profit company called Epic Youth Services (EYS). EYS received a 10 percent cut of taxpayer-funded revenue. Epic’s founders, David Chaney and Ben Harris were the co-owners of EYS, with Chaney serving as both the first superintendent of the school and the CEO of EYS.4
EYS attempted to block the Oklahoma investigation into its dealings, arguing that it was a private for-profit corporation and did not need to make its financial dealings public – even though it received public funds. After a ten-year investigation, Chaney, Harris, and Josh Brock, the long-time financial officer for both Epic Charter and EYS, were arrested in June of 2022 for cheating Oklahoma taxpayers out of tens of millions of dollars.5
The trio had regularly enrolled “ghost students,” including students in home and private schools, created fake invoices, used school credit cards for personal items, and dipped deep into the aforementioned “learning funds” account to make political contributions to stall and obstruct the audit. Chaney, Harris, and Brock regularly used the learning fund advertised in the Anaheim flyer not only as a way to entice new students to the school but as a personal piggy bank. Whether Chaney, Harris, and Brock will serve time for their crimes is yet to be determined. In a similar scam involving online charter schools in California known as the A3 scandal, the two criminal ringleaders behind the bilking of hundreds of millions from taxpayers were not required to spend even a single night in jail. 6
Perhaps most disturbing is that most of what Epic did is perfectly legal. Assigning no-bid contracts to friends and relations, giving parents bonuses for enrolling their own student or steering others to the school, and even paying teachers, as Epic did, for every student they enrolled were not the reason for the arrests. These practices are permissible in Oklahoma and would also be allowed in most other states. The Epic chain recently moved to selfmanagement and is on probation. Its future is unclear.
Since our March 2021 report the online for-profit charter sector has dramatically expanded its enrollment, accounting for most of the enrollment growth in charter schools during the pandemic. For example, enrollment in Epic, the corrupt online chain described above, more than doubled, increasing by over 31,000 students between the 2019-2020 and the 2020-2021 school years alone. (pp. 5-6)
The study revealed many serious reasons for concern, including for-profits having lower student achievement, lower graduation rates, and higher absentee rates. Students in for-profit virtual charters quickly fall behind those in brick-and-mortar schools. And the more services that the for-profit provides, the greater the adverse consequences to kids. (p. 9)
More disturbing is that 27 percent of the students attending for-profit-run schools were enrolled in low-quality virtual charter schools that teach students either exclusively or primarily online. (p. 10)
The pandemic certainly accelerated the growth of for-profit online schooling, a sector already the fastest-expanding charter school sector. Charters operated by the for-profit online giant Stride K12 increased from 72,474 students in 2019-2020 to 110,767 in 2020- 2021. Its strongest competitor, Pearson’s Connections Academy, experienced even greater proportional growth, from 53,673 to 85,749. Later in this report, we will discuss the growing numbers of students in virtual schools, the problems associated with that sector, and why for-profit operators are attracted to running them. (p. 10)
Thirteen EMOs run chains of 20 or more charter schools. Below are short profiles of the five largest for-profit operators with a multi-state presence. Four of the big five began with the charter movement in the 1990s. ACCEL, which is an outgrowth of the online for-profit charter Stride K12, is the most recent arrival and the fastest-growing for-profit chain. For more detailed information on each, see our 2021 report. (p. 24)
ACADEMICA
Managed schools: 205
Increase since 2020: 16 schools
National presence: Arizona, Colorado, Florida, Georgia, Idaho, Nevada, North Carolina, South Carolina, and Texas.
School type: Primarily brick and mortar, some virtual.
Corporate status: Privately owned by Fernando Zulueta, who serves as CEO. He also owns related organizations that do business with the school.
NATIONAL HERITAGE ACADEMIES (NHA)
Managed schools: 101
Increase since 2020: 1 school
National presence: Colorado, Georgia, Indiana, Louisiana, Michigan, New York, North Carolina, Ohio, and Wisconsin.
School type: Primarily brick and mortar. One virtual charter school.
Corporate status: Privately owned by its founder J.C. Huizenga, the CEO and president of NHA. He is the owner of related organizations. (p. 24)
ACCEL SCHOOL, a subsidiary of PANSOPHIC
Managed schools: 67
Increase since 2020: 17 schools
National presence: Arizona, California, Colorado, Michigan, Minnesota, Ohio, Washington and West Virginia.
School type: Brick and mortar and online.
Corporate status: A private company owned by CEO Ron Packard and Safanad Limited, an investment company located in Dubai.
THE LEONA GROUP, LLC
Number of Managed Schools: 50
Increase since 2020: 3 schools
National Presence: Arizona, Indiana, Michigan, and Ohio.
School type: Primarily brick and mortar. One virtual charter school.
Corporate status: Privately owned by its founder, Bill Coats, the CEO and president of Leona Group LLC. (p. 25)
This report began with the story of the Oklahoma virtual school giant, Epic charter schools. During the pandemic, the total enrollment in Epic charter schools rose to nearly 60,000 students. By the spring of 2021, it began to crumble — it fired its for-profit management company, and enrollment plummeted to 39,427 during the 2021-2022 school year.
Nationally, virtual charter schools run by for-profits, both large and small, dominate the virtual charter school landscape – a landscape that is growing. During the 2020-21 school year, an additional 175,260 students enrolled in virtual charters bringing the total enrollment in virtual charters to 483,871. Even more importantly, that shift accounted for over 70 percent of the increase in charter school enrollment between the 2019-2020 and 2020-2021 school years – the pandemic years. The increase was heralded as a victory for school choice. 56
In 2020-21, 141 virtual charter schools were run for profit and enrolled 61 percent of the nearly half-million students in virtual charter schools.
Eighty-three were run by two longstanding and prosperous charter chains – Stride K12 and Pearson’s Connection Academy. Together, these two corporations alone enrolled nearly 41 percent of all students in virtual charter schools that year.
During the first year of the COVID-19 epidemic, Stride K12 engaged in an aggressive marketing campaign that resulted in a sharp increase in enrollment. Charters operated by Stride K12 increased from 72,474 students in 2019-20 to 110,767 in 2020-21. One school alone, Ohio Virtual Academy, nearly doubled from 12,693 to 21,049 between 2019-20 and 2020-21. In 2021-2022, enrollment dropped to 16,161 — a substantial decrease but still higher than prior to the pandemic.
Like Stride K12, Connections ran television ads on cable networks throughout the COVID-19 pandemic.57 Pearson’s Connections Academy experienced an even more substantial proportional growth in enrollment than its primary competitor, from 53,673 to 85,749 during the pandemic’s first year.
Stride K12 “spent about $1.8 million on TV ads in just the first quarter of 2021, up from $1.2 million in the same period last year, according to an analysis for The Hechinger Report conducted by the consulting firm Kantar Media. Connections Education spent $1.2 million in that period, almost quadruple last year’s spending, the analysis showed.”
Why are Online Charter Schools so Attractive to Profiteers?
The answer is simple. There is a lot of money to be made. Although there are no real estate empires to be built, online charter schools provide enormous profit opportunities with their minimal overhead combined with the ease by which schools can “cook the books” on attendance.
In March 2022, The Government Accountability Office (GAO) issued a critical report on virtual charter schools.58 One of their concerns was the haphazard way that many virtual schools take attendance. The GAO investigators found that some schools relied on students only logging into a portal or a program, regardless of how long they stayed. While some virtual charters took daily attendance, others only took weekly or monthly attendance.
Because enrollment data determines how much money virtual charter operators will get from our state and federal tax dollars, manipulating those numbers can significantly enhance end-of-year profits. Fraud, costing taxpayers hundreds of millions of dollars, from enrollment schemes involving virtual schools has occurred with alarming frequency. Notable cases include the A3 charter school network, 59 Epic charter schools, 60 California Virtual Academy (CAVA),61 a Stride K12 school, and Ohio’s Electronic Classroom of Tomorrow (ECOT).62
Even for those not engaging in fraud, virtual charter schools are still a source of enormous profit, which is why for-profits operate over half of the sector. The GAO provides insight into why this is so. According to the report, “The student-teacher ratio across virtual charter schools was about 75 percent higher than for brick-and-mortar traditional public schools, according to 2017-2018 CRDC data.” The GAO found that while district public schools spent $13,646 per student on instructional staff in 2017-18 (50 percent of all of their income), virtual charters spent only $8,295 per student (25 percent of all of their income). (pp. 26-27)
STRIDE K12
Managed schools: 57
Increase since 2020: 6 schools
National presence: Arizona, Arkansas, California, District of Columbia, Florida, Idaho, Indiana, Kansas, Louisiana, Maine, Michigan, North Carolina, Nevada, South Carolina, Oklahoma, Ohio, Oregon, Pennsylvania, Utah, and Wisconsin.
School type: Virtual Schools
Corporate status: A publicly traded corporation (p. 27)
PEARSON’S CONNECTIONS ACADEMY
Managed schools: 39
Increase since 2020: 6 schools
National presence: Arizona, Arkansas, California, Colorado, Florida, Idaho, Indiana, Kansas, Louisiana, Maine, Michigan, New Mexico, Nevada, North Carolina, Nevada, South Carolina, Oklahoma, Ohio, Oregon, Pennsylvania, Texas, Utah, and Wisconsin.
School type: Virtual Schools
Corporate status: A publicly traded corporation (p. 28)
During the pandemic, the low-performing for-profit online charter schools expanded, and one chain, Charter Schools USA, jumped into the micro-school market. Whether or not such schools are in the best interest of children or taxpayers is irrelevant to the free market. The marketplace expands where there is an opportunity, using marketing to draw customers. The pandemic provided that opportunity. (p. 31)
Pearson Plc sells Online Learning Services business to Regent LP
by Ali Mirza| Posted on
LONDON, UK: Pearson Plc has agreed to sell Pearson Online Learning Services (POLS) to Regent LP, a global private equity firm focused on acquiring businesses and deploying its strategic and operational expertise to fuel growth and innovation.
In August 2022, Pearson plc, the world’s leading learning company, announced a strategic review of its international Online Program Management (OPM) business, Pearson Online Learning Services (POLS).
The sale of this business concludes the strategic review and demonstrates further progress in reshaping Pearson’s portfolio towards future growth opportunities centered on lifelong learning.
The consideration to be received by Pearson is deferred and comprises:
Each year, for a period of 6-years from completion of the transaction, 27.5% of POLS positive Adjusted EBITDA in each calendar year (pro-rated where only a portion of a calendar year falls within the period). Pearson will not share in any loss making periods;
A further contingent payment equal to 27.5% of the proceeds received by Regent in relation to any monetisation event of POLS following completion of the transaction.
When received, the proceeds of this transaction will be used for general corporate purposes within Pearson’s capital allocation framework.
The POLS business had gross assets of £113m and net assets of £78m as at 31 December 20222. The business, which excludes Pearson’s contract with ASU, generated £155m of revenue and £26m of adjusted operating losses in 2022 with around £5m of stranded costs, which have now been eliminated. Statutory losses before tax, which include restructuring, intangible and finance charges, were £52m in 2022.
The impact of the sale on Pearson’s 2023 adjusted operating profit will be dependent upon the timing of transaction completion but is likely to be immaterial.
Morgan Stanley acted as financial adviser and Freshfields Bruckhaus Deringer acted as legal adviser to Pearson on this transaction.
Regent is a global private equity firm focused on acquiring businesses and deploying its strategic and operational expertise to fuel growth and innovation. Since its inception, Regent has acquired businesses from leading Fortune 500 and large-cap companies including Caterpillar, Arcelor Mittal, eBay, Ralph Lauren, Hanes Brands, Tegna, L Brands and Hain Celestial among others. Regent’s portfolio includes companies in the media, technology, industrial and retail sectors across Europe, Asia and the Americas.
It is important to note that the Pearson Online Learning Services are their higher education online programming, and not their K-12 programming. But it does beg the questions of whether this indicates a trend within Pearson? Will the K-12 online services go? Will there be a new emphasis and focus on their K-12 divisions in general?
So last week I wrote a bit of a commentary when I posted the notice of John’s blog entry on Student Art and School Funding, and in that entry I mentioned I wanted to return to the topic of how Stride Inc. (formerly K12, Inc. reported its revenue and expenses). Regular readers of this space will note that I regularly (almost daily when I receive them) post the corporate notices for Stride Inc. (under their ticker label of LRN). Historically, the court has found that schools managed by corporate educational management organization are private, proprioriety organizations and that they don’t have the same disclosure requirements as traditional public schools (and this is true of both online and brick and mortar examples – and almost all of these court cases have focused on corporate EMOs that operate brick-and-mortar schools). Even in instances where the online schools provide disclosure, many of the guidelines continue to be written for brick-and-mortar environments- which means that online schools have to figure out where to put X and Y, and they don’t always make the same decision (see Funding Virtual Schools – Michigan Edition for a good example).
What all of this means is that the corporate filings that are required by the SEC continue to be some of the best sources of information for what we know about the corporations. But that level of detail is changing based on recent business decisions. If you look at the corporate filings of Stride Inc., historically they have broken down their revenue and expenses based on the following three line.
Taken from the 2020 annual report.
As you can see from the descriptions, the “Managed Public School Programs” provided a great deal of information about the amount of revenue and expenses, number of schools in each category, number of students enrolled in each category, etc.. In fact, even the “Institutional” line was useful, as this was similar data for instances where they partnered with or were contracted by a public school district to provide similar services to what is included in their managed programs.
However, beginning with the 2021 annual report, they have changed those three lines to these two:
Products and services for the General Education market are predominantly focused on core subjects, including math, English, science and history, for kindergarten through twelfth grade students to help build a common foundation of knowledge. Programs utilizing General Education products and services are for students that are not specializing in any particular curriculum or course of study. These programs provide an alternative to traditional school options and address a range of student needs including, safety concerns, increased academic support, scheduling flexibility, physical/health restrictions or advanced learning. Products and services are sold as a comprehensive school-as-a-service offering or à la carte.
Career Learning products and services are focused on developing skills to enter and succeed in careers in high-growth, in-demand industries—including information technology, health care and business. The Company provides middle and high school students with Career Learning programs that complement their core general education coursework in math, English, science and history. Stride offers multiple career pathways supported by a diverse catalog of Career Learning courses. The middle school program exposes students to a variety of career options and introduces career skill development. In high school, students may engage in industry content pathway courses, project-based learning in virtual teams, and career development services. High school students also have the opportunity to progress toward certifications, connect with industry professionals, earn college credits while in high school, and participate in job shadowing and/or work-based learning experiences that are required to succeed in today’s digital, tech-enabled economy. A student enrolled in a school offering Stride’s General Education program may take Career Learning courses, but that student and the associated revenue is not reported as a Career Learning enrollment or Career Learning revenue. However, a student and the associated revenue, whether in middle or high school, is counted as a Career Learning enrollment or Career Learning revenue if the student is enrolled in a Career Learning program. Like General Education products and services, the products and services for the Career Learning market are sold as a comprehensive school-as-a-service offering or à la carte. The Company also offers focused post-secondary career learning programs to adult learners, through its Galvanize, Inc. (“Galvanize”), Tech Elevator, Inc. (“Tech Elevator”), and MedCerts, LLC (“MedCerts”) brands. These include skills training in the data science, software engineering, healthcare, and medical fields, as well as providing staffing and talent development services to employers. These programs are offered directly to consumers, as well as to employers and government agencies.
As you can see from the descriptions, while it appears that most of their managed public school programs would fall into the General Education line, there are a lot of other things that get included in General Education. Additionally, some of the managed public school programs that have a specific focus on career and technical education would fall under the Career Learning line. So a level of transparency that used to exist for those of us in the field is no longer available to us
And this is not to specifically pick on or single out Stride Inc., as historically their corporate filings have told us a lot more about their operations than what Pearson’s filings tell us about the role that Connections Education and their Connections Academies play in their overall revenue. Pearson is a much bigger and more international corporation with many more streams of revenue and expenses. So trying to determine what profit margins might exist from managed schools is difficult. If you look at Pearson’s latest filings, its 2021 annual report indicates that:
Overview
The Group (i.e., Pearson) is a leading provider of educational materials and learning technologies. It provides test development, processing and scoring services to governments, educational institutions, corporations and professional bodies around the world. It provides content across the curriculum and a range of education services including teacher development, educational software and system-wide solutions, it owns and operates colleges and schools (including virtual schools). The Group is run as one global learning company, operating around six geographical areas (UK, Europe, US, Canada, Asia Pacific, Other countries) organized in five main global business divisions, each of which are reporting segments (Virtual Learning, Higher Education, English Language Learning, Workforce Skills and Assessment & Qualifications). Within each geographical area, the Group provides content, assessment and digital services to schools, colleges and universities, as well as professional and vocational education to learners. The results of the Businesses under Strategic Review are reported separately.
If we try and focus in just on the Virtual Learning segment, it includes:
Virtual Learning Virtual Learning comprises our Virtual Schools and Online Program Management (OPM) businesses. There is a growing international demand for virtual schooling, partly down to advances in technology, but also accelerated by the recent pandemic. Our Virtual Learning division offers highly effective online learning for every age and stage of education. Users are able to learn where, when, and how they learn best, giving them a truly personalized experience. It’s designed to be smart, flexible, and inspiring education that propels people forward in their lives and careers. Students in grades K-12 in the US (equivalent to primary and secondary school in the UK) can enrol in full-time online public or private school programs offered by Pearson Virtual Schools. Fully accredited and staffed with specially trained teachers, these online schools have been providing high quality alternatives to the traditional classroom experience for over 20 years. Students are prepared to be adaptable; equipped with the academic and life skills they need to thrive today and in an ever-changing world. K-12 online school options include Connections Academy (US-based public schools), Pearson Online Academies (international private schools), and programs for school districts across the US. Adult learners, universities and employers rely on Pearson for exclusive online higher education programs and Online Program Management (OPM) services, including degrees, certificates and short courses. Students gain access to convenient, compelling online learning to boost employability and advance in their careers, while higher education institutions extend their reach and provide the flexible online options their students want. For employers, our OPM business delivers vital upskilling and reskilling to keep pace with the future of work. This business operates in the US and internationally. See “Item 5. Operating and Financial Review and Prospects — Results of Operations — Year Ended December 31, 2021 compared to year ended December 31, 2020 — Sales and operating profit by division — Virtual Learning” for a discussion of developments during 2021 with respect to this segment.
In trying to figure out what impact this might have on the overall corporate operations, they write later in the report:
Virtual Learning Virtual Learning sales increased from £692m in 2020 to £713m in 2021, an increase of £21m or 3%. The Group estimates that after excluding the impact of exchange rates, Virtual Learning’s sales increased by 11% in 2021 compared to 2020. Revenue growth reflects strong enrolment growth in Virtual Schools in the 2020/2021 academic year, with good underlying enrolment growth in OPM. Adjusted operating profit grew 28% in underlying terms, due to operating leverage and efficiency improvements in OPM more than offsetting the investment in our Virtual Schools’ platform and customer care support, as well as margin impact in OPM due to discontinued programs. Headline profit grew 10% with good growth in adjusted operating profit partially offset by currency movements. Virtual Schools performed strongly driven by 43% enrolment growth in new and existing schools for the 2020/2021 academic year. We opened five new full-time, online partner schools in Florida, Rhode Island, Colorado, South Carolina, and Oregon. We also announced our first Connections Academy in the state of Virginia, which begins enrolment in March 2022, one school in New Mexico moved from a partner school to district programme. This brings the 2021/2022 total number of partner schools to 47 in 30 states. Enrolments in the 2021/2022 academic year grew by 2% despite a significant unwinding of the “covid cohort”. In OPM, we saw good underlying enrolment growth of 7% as Maryville University extended its OPM partnership for online degrees in the high-demand field of Nursing through to 2033 and Northeastern University added a new online master’s degree and certificate programs in Nursing and Healthcare. We ended the year with a total of 477 programs across 31 partners with the addition of 43 new programs in North America across 21 partners, and 7 new programs internationally where underlying enrolments grew by more than 80%. The Virtual Learning results also include intangible charges of £25m in 2021 compared to £30m in 2020 reflecting the impact of historical acquisition activity. Major restructuring costs were £48m in 2021 and £nil in 2020.
So not really any details on what virtual learning revenue and expenses come from US-based virtual learning and what comes from international sources, and no real way of figuring out what comes rom their “virtual schools” compared to what is for their other forms of virtual learning.
Anyway, since it came up last week in the entry on Student Art and School Funding – as well as the fact that I was also recently accused of being a Stride Inc. supporter because I post their corporate news as it crosses my electronic desk – I wanted to dive into this topic a bit more and give folks a chance to comment.
May 18, 2021 10:36 AM ET Stride, Inc. (LRN) By: Josh Fineman, SA News Editor
Stride Inc. (NYSE:LRN) rose 1.3% after a report that Pearson plc (NYSE:PSO) is said to be preparing a bid for the online education company. Pearson fell 1.5%.
Pearson is said to be working with advisors on a potential offer for Stride, which was previously known as K12, according to a StreetInsider report, which cites an unidentified source.
Stride was previously reported to be a potential takeover target about a month ago, according a Betaville report.
Stride short interest 9.1% of float.
Last month, Stride gained after earnings but Morgan Stanley sticks with cautious rating.
In less than four hours, the story was cleared up.
Last week I posted an entry entitled Breaking: NPE Releases New Report on Charters Run for Profit. At the time I just posted the press release from the Network for Public Education, but today I wanted to focus in on some of the cyber charter school aspects of the report. The report is available at:
There are many references to cyber charter schools, for example
Despite the commonly held belief that families and teachers initiated the charter school movement, large for-profit management companies appeared and expanded from its earliest days. Within five years of the opening of the first charter school in Minnesota (1992), the four dominant brick and mortar for-profit chains—National Heritage Academy, The Leona Group, Charter Schools USA, and Academica began building their operations. These four corporations, plus the three largest for-profit online charter corporations (K12 Inc., Pansophic Learning/ACCEL, and Pearson/Connections Academy) manage 555 schools across the country; nearly half of our identified schools. Other large chains operate clusters of schools in only one state.
Of the 138 for-profit management corporations, a majority (73) run only one or two schools, a practice designed to get around state laws that prohibit for-profit charter schools, while ensuring that profit can go into the school manager’s pocket and that transactions and salaries can be hidden from public view. (pp. 4-5)
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Cost-cutting strategies designed to increase profit are a standard business practice. This is often achieved by reducing personnel costs. In education, that means either paying teachers less or paying fewer by increasing class size. In 2010, the Florida Center for Investigative Reporting released a confidential document from K12 Inc. that showed that in some of K12’s online high school courses, the student-teacher ratio was 275 to 1.11 (p. 10)
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Let there be no mistake. Non-profit charter management organizations have also found devious ways to eke out a profit from schooling via oversized salaries and nepotism, real estate deals, related for-profit companies, and sometimes outright fraud. Three of the four charter management organizations that have run a Cape Coral, Florida charter school, presently known as Heritage Academy Charter School, 14 were for-profits. However, a fourth, Celerity Education Management, was a nonprofit whose founder and CEO misappropriated and embezzled a total of $3.2 million.15 And the largest charter school scandal to date, one that funneled tens of millions of dollars into the owners pockets via kickbacks and falsified attendance records, involved an online nonprofit called A3. (p. 11)
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It has a full section on “Online and Other Chains” that includes the main cyber charter companies that begins on page 28 and continues to page 32.
We now turn to the online or virtual charter market.
Although there are no real estate empires to be built, online charter schools provide enormous profit opportunities with their minimal overhead combined with the ease by which schools can “cook the books” on attendance.
The first for-profit online charter school emerged in 2000 when former banker Ron Packard founded K12 Inc. K12’s rival, online Connections Academy, began a year later in 2001.
K12
The first online provider of charter schooling to enter the marketplace was K12, Inc. Ron Packard founded K12 with a $10 million investment from Michael Milken and $30 million from other Wall Street investors. Previously, Packard had worked for Milken, the “junk bond king,”56 as Senior VP of Milken’s investment holding firm, Knowledge Universe Learning Group, and CEO of Knowledge Schools, a chain of pre-schools.57
Between 2009 and 2013, Packard was paid more than $19 million as the company’s CEO. The Center for Media and Democracy estimated that 86 percent of K12’s revenue came from taxpayers during that same period.58
In an interview, Packard describes how K12 scaled its business model quickly by creating a web of non-profit entities that K12 could “turnkey” into charter schools.59
K12 turned parents interested in an online school in their state into “entrepreneurs.” Packard explained, “they [parents] formed the not-for-profit entities, and they go through the process of getting legal permission for the school. Once they did that, we could turnkey for them.” K12 became a publicly-traded company in 2007.60 Five years later, a shareholder lawsuit61 and a front-page New York Times article accused K12 of lying to investors and putting profits over kids.62 To avoid the scrutiny that comes with a publicly-traded company, in 2014, K12 announced a new, yet-to-be-named company financed by Safanad Limited, an investment company located in Dubai. This company was to become Pansophic Learning, which we discuss below.
A summary of Packard’s career founding and leading for-profit charter management corporations can be found by clicking on the LittleSis map on the following page.
The controversy surrounding K12 did not end with Packard’s departure, however. In 2016, after an extensive investigation of the for-profit’s dealings in California, then-Attorney General Kamala Harris announced a $168.5 million settlement with K12 due to its misleading advertising to prospective students and the reporting of inflated attendance numbers.63
The California decision had a cascading effect on K12 operations. A few months later, the Farmington, New Mexico School Board voted to shut down K12’s New Mexico Virtual Academy, after the state’s Attorney General, Hector Balderas, said that he intended to investigate the school.64 Balderas’ predecessor, Gary King, had released an opinion two years prior, stating that he believed the school violated the New Mexico Charter Schools Act, prohibiting for-profits from operating charter schools. In 2019, the Georgia Cyber Academy broke off its relationship with K12, resulting in students bearing the brunt of a contentious separation.65
Nevertheless, K12 revenue topped one billion dollars that year as it expanded a new line of online vocational schools, Destination Career Academies. Presently the corporation operates 51 online charter schools in 20 states.66
Connections Academy
Connections Academy was founded in 2001, a year after K12. It is a subsidiary of the multinational testing and curriculum publication corporation Pearson, headquartered in the United Kingdom. It presently operates 33 online charters in 22 states.
In the Public Interest (ITPI) is a national non-profit research and policy organization located in California. It regularly issues reports on taxpayer-funded goods and services, highlighting when public funding is abused. In February of 2021, it issued a report on California’s online charter schools entitled, Costly Failure: California Is Overpaying for Online Charter Schools That Are Failing Students. 67 The report included a critique of Connections Academy, which operates eight charter schools in that state. Although for-profit operators are now banned by law in California, Connections formed a non-profit facade, CalOPS, to act as a CMO between the for-profit and its schools. A tweak in the model and the law loses its teeth.
Many of ITPI’s findings regarding how much profit Connections extracts from its schools are significant. For example, ITPI estimates that the excess profit rate (profit rate of Connections compared with brick and mortar schools in California) is likely between 35 and 40 percent. Also, what Pearson charges appears not to be dependent upon actual cost, but rather, to put it bluntly, what they can get away with depending on the state. According to the report: “
Californians pay significantly more per-pupil than some other states. Some portion of this difference may reflect differential pay rates for school staff. But the gap between California and other states’ funding rates cannot be wholly attributed to teachers’ salaries.
For instance, each Connections Academy school pays 11-11.5 percent of its total revenue to Connections Education in return for treasury, marketing, and school administration services. These payments are sent to Pearson’s corporate offices in Maryland. However, even though administrative or treasury services performed in Maryland should cost the same no matter which school they are serving, schools based in different states pay very different rates for these services. In Oklahoma, Connections Academy pays $720 per pupil for these services; in California, Connections Academies pay $1,143 for the same services.”
In the Public Interest obtained fee schedules and invoices for Connections Academies via public information requests. They found nearly a $10,000 difference between the per-pupil funding that Connections takes in Pennsylvania as compared with Oklahoma. Profits like these have allowed the corporation to run television ads on major cable networks throughout the ongoing novel coronavirus pandemic.68 In short, taxpayers in some states subsidized the online school’s marketing in other states, including states like New York, where Connections Academy charter schools do not exist presently.
Pansophic Learning and ACCEL
In 2014, K12 announced a new, yet-to-be-named company financed by Safanad Limited, an investment company located in Dubai. Safanad would be the majority investor, and K12 would be the minority investor. This corporation would develop a portfolio of brick and mortar and online schools, plucking established chains that failed.
When Ron Packard and Safanad announced the rollout, Packard was identified as being in charge. The new corporation acquired licenses for K12 curriculum and technology, as well as “an international brick and mortar private school, a higher education platform business and the K12 business in the Middle East.” Pansophic Learning’s name and address were used to register a new Ohio for-profit, ACCEL Schools, LLC.
Seven months later, Pansophic took over the contracts of 12 charter schools managed by the controversial White Hat Management. 69 In July 2015, another large for-profit education management organization operating schools in Ohio, Mosaica, ran into financial trouble and sold its assets to Pansophic Learning.70 The deal added another 15 charters to ACCEL’s growing portfolio.
Packard was clear about the business strategy behind his purchase of these distressed charter chains. “By purchasing both of these entities, it gave us a base business to build off of. It’s just very hard to start from nothing. We will open a lot of new schools, but this gave us a critical operating mass from which to build on.”71
Packard continued to build a “critical operating mass” for his new venture. He took over the contracts for 12 I CAN charter schools, 72 and also the Ohio Distance Learning Academy (OhDELA), the last of the White Hat schools.73
The OhDela contract is a sweeps contract that funnels 97 percent of the school’s revenue to ACCEL. We looked at several other contracts for ACCEL charters in Ohio and found that schools pay ACCEL either a 12.5 percent or an 18 percent management fee.
While ACCEL’s model of taking over distressed assets may not include real estate, their charter contracts do stipulate that ACCEL will “identify a suitable facility…and arrange for a lease to be entered into by the Governing Authority for the operation of the School,” thus providing the opportunity to profit from the building leases.
We searched the Ohio “Community Schools Documents” database and found that Global School Properties Ohio, LLC holds the leases for many ACCEL charter schools.74 The lessor is at the same 1650 Tysons Blvd. address in McLean, Virginia, as Pansophic and ACCEL Schools.75
The charter contracts indicate that there are numerous other opportunities to realize profits. By contract, ACCEL oversees all of the following areas of school operations: talent acquisition; human resources administration; financial management; payroll and benefits; grants management; executive leadership; curriculum, instructional design and educational philosophy; marketing and community outreach; food service management; professional development for all staff, centralized purchasing, board governance services, transportation management, building-level leadership training and supervision, fundraising and technology administration.
The employee reviews of ACCEL on the Indeed job search website are scathing, with many accusing ACCEL of cutting corners on staff and students to increase profits. The reviews, which are mostly one or two stars, are best summed up by this comment:
The emphasis is on the “state tests” not on the students. Staff is told what they will do, not asked. Then, the next day, it is changed. Everything here is about getting money or saving money instead of providing quality education and fair wages. Most of the employees quit when Accel took over the schools, now we know why. Half the teachers are already looking for other jobs, and it’s only March. Most of the teachers are long-term substitutes that are new to teaching, many are unqualified to teach.
58 PRWatch Editors. (2014, February 19). “New Report Exposes America’s Highest Paid Government Workers.” Center for Media and Democracy. Retrieved from https://www.prwatch.org/ news/2014/02/12393/new-report-exposes-america%e2%80%99s-highest-paid-government-workers
64 Kellogg, Joshua. (2016, December 16). “Board votes to close New Mexico Virtual Academy.” Farmington Daily Times. Retrieved from https://www.daily-times.com/story/news/education/2016/12/16/ board-votes-close-new-mexico-virtual-academy/95516964/
68 Connections Academy TV Commercials. (n.d.) iSpot.TV. Retrieved from https://www.ispot.tv/ brands/ZxC/connections-academy
69 O’Donnell, Patrick. (2015, June 9). “White Hat charter school operator may sell off management of 12 schools.” Cleveland Plain Dealer. Retrieved from https://www.cleveland.com/metro/2015/06/ white_hat_charter_school_opera.html. For more information on White Hat Management, see “Education Empire: David Brennan’s White Hat Management, Inc.” a report by the Food and Allied Service Trades Division of the AFL-CIO in cooperation with the Ohio Federation of Teachers. (2006, May). Available at: http://oh.aft.org/files/article_assets/E0B509E4-04D7-1131-E6AC03D0698CD6DC.pdf
71 Strauss, Valerie. (2016, September 10). “If this guy is elected, you can kiss public schools goodbye.” The Washington Post. Retrieved from https://www.washingtonpost.com/news/answer-sheet/ wp/2016/09/10/critics-of-trumps-education-policy-kiss-public-schools-goodbye-if-he-wins/
72 O’Donnell, Patrick. (2019, January 11). “I Can charter schools turned over to Accel network run by former CEO of K12 Inc.” Cleveland Plain Dealer. Retrieved from https://www.cleveland.com/ metro/2017/03/i_can_charter_schools_turned_o.html
75 Registration of Foreign For Profit LLC. (2015, June 30). Global Schools Properties Ohio LLC. Ohio Secretary of State. Retrieved from http://education.ohio.gov/Topics/Community-Schools/Commu- Chartered for Profit: The Hidden World of Charter Schools Operated for Financial Gain 51 nity-Schools-Documents
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