Arizona taxpayers funding firms to run online schools

Every year, tens of millions of dollars in state taxpayer money go to for-profit companies to run Arizona's largest K-12 online schools.

That has prompted some educators to warn that the state is putting money in the pockets of shareholders and executives whose priorities are more about profit and personal gain than quality of education.

State-approved online schools are public schools that Arizona students can attend for free. The five largest are charter schools. Two of the schools are for-profit companies. The other three are non-profits but turn over anywhere from about half to almost all of their money to for-profit companies to run the school or provide services.

Involvement of private firms in public education is not new.

For-profit companies operate buses and provide textbooks and cafeteria food for public schools.

The controversy arises when a single for-profit company is hired to run a public school, provide the courses and hire teachers and the principal, which is happening in some online charter schools, said Michael Barbour, an education professor at Wayne State University in Michigan who researches online schools.

"Never in the history of the United States have we abdicated our responsibility for public education to the private sector," Barbour said. "We are essentially handing over government funds so we can run public schools the same way we run a business."

Officials from online businesses say the worries are unfounded. Online companies have the resources to provide consistent, high-quality programs to thousands of students regionally or nationally. The profit motive and competition spur companies to maintain quality while still finding efficiencies to serve states with varying funding levels.

"There have always been for-profits that helped schools," said Sari Factor, CEO of e2020, a Scottsdale-based online management and curriculum company, which was recently bought by Weld North, a capital investment firm. The company has contracts with 24 Arizona charter schools and districts.

Schools have always used for-profit companies for consulting, curriculum and hardware, Factor said.

"No one ever questioned that piece," Factor said. "It's just now that we're in what we consider the core competency of schools -- delivering instruction -- that it starts to become questionable."

A growth industry

With more states promoting online education, companies see a massive business opportunity.

Two years ago, Arizona lifted caps on the number of schools that can provide statewide courses under the Arizona Online Instruction program. Now, any school district or charter school can apply to set up online programs that are open to any child in the state.

Since 2009, the number of schools approved by the state has jumped from 14 to 66.

Enrollment in online classes will likely accelerate in the future, experts say. High-speed Internet is widespread, and online schools are marketing aggressively with television ads, signs in shopping malls, contests and special events.

"I think the world's moving to where every single child in the U.S. will take at least one course per year online, probably two," Ron Packard, CEO for K12 Inc., said in a recent conference call with analysts. K12, a for-profit company based in Virginia, is the nation's largest provider of online education in grades K-12 and has a contract to operate one of Arizona's largest online schools.

This school year, statewide online schools in Arizona are on target to enroll more than 36,000 students and get at least $80 million in state funding. About nine out of 10 students are in charter schools, which are expected to get $76 million or more.

More school districts are setting up online programs. Some contract with private providers. District programs make up the fastest-growing segment of K-12 online learning nationally, according to Keeping Pace with K-12 Online Learning, an annual survey of online policy and practices.

Blurring for-profit, non-profit

Arizona's five largest online charter schools take one of two forms:

The school is a non-profit that contracts with a for-profit company to provide most or all of the courses, curriculum, software and other services. State and federal money passes through the non-profit to the company. The non-profit may take a small percentage off the top. In some cases, the non-profit was set up by the for-profit chain. Most charter schools are non-profits because a for-profit company cannot receive federal and private foundation funds.

The school is a for-profit business that handles all or most aspects of instruction and receives state, but not federal, funds. It may outsource some services to other companies.

Two of the five largest schools, Pinnacle Online High School and Sequoia Choice Arizona Distance Learning School, are for-profit firms and run their own operations.

Two others, Arizona Virtual Academy and Arizona Connections Academy, are non-profits that contract with national chains to run their schools. The fifth, Primavera Online High School, is a local non-profit whose learning software and curriculum are provided by a local for-profit company.

Arizona Virtual Academy reflects how the pass-through partnership works.

The school has 5,152 full-time students this year and its administrative offices are in a two-story brick complex near Central Avenue and Thomas Road. Teachers work out of their homes.

The academy is a brand name used by a Tucson-based non-profit called Portable Practical Educational Preparation, which also runs 10 brick-and-mortar charter schools. But all of AVA's services -- the teachers, the administrators, the teaching materials -- are provided by for-profit giant K12 Inc. to operate the school.

PPEP receives state funding for Arizona Virtual Academy. The non-profit keeps from 2 percent to 3 percent of the funds and passes the rest to K12 Inc. to operate the school under contract. In fiscal 2010, PPEP received about $28 million in mostly state money for Arizona Virtual Academy, kept about $580,000, and gave the rest to K12 Inc., according to PPEP's tax returns and a one-page financial summary provided by PPEP.

K12 Inc. will not comment on how much profit it makes from a state or school. Online charter schools must file annual financial audits to the State Board for Charter Schools, but the information isn't enough to determine how much profit is made by vendors or parent companies.

Nationally, K12 Inc. posted a profit in six of the past nine years. In fiscal 2011, the company had a $12.8 million profit on record revenues of $522 million. Most of its revenues, 85 percent, came from online schools. This year, the company manages schools in 29 states and Washington, D.C. In fiscal 2010, Packard, the CEO, earned $2.6 million in compensation and cashed in $3.5 million in options and stocks awarded in prior years, according to documents filed with the Securities and Exchange Commission.

K12 Inc. also sells online curriculum to school districts and parents. K12 officials say more than 150 schools and districts use the company's educational products and services, including courses for kindergarten through high school in core subjects, foreign languages, and honors and credit-recovery courses.

In the conference call with investors, Packard described fiscal 2011 as a transformational year. New online schools opened in two states, online enrollment caps were eased or removed in half a dozen states, and the company bought a private school in Switzerland and launched the private George Washington University Online High School.

"We may have accomplished more this past year than in any other year in our history," Packard said. "First and foremost, we marched toward our manifest destiny of making a K12 education available to every child."