How companies can turn a profit running public schools

The ABCs of Charter Schools

Charter schools are one option in the growing "school choice" movement. Funded by taxpayer money, these schools are growing nationally, though some states have yet to pass related laws. Find out what sets them apart.
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Charter schools are one option in the growing "school choice" movement. Funded by taxpayer money, these schools are growing nationally, though some states have yet to pass related laws. Find out what sets them apart.

A start-up culture dominated the founding of charters in 1997, when community leaders, teachers and local nonprofits opened schools to project their vision of public education. Even the Wake County jail had a charter.

Charters still sprout from local initiatives, but what supporters call the “charter school movement” has been helped along by networks of schools – including for-profit chains.

Keith Poston, president and CEO of The Public School Forum of North Carolina. Jeff Cravotta

“It started as primarily a local effort where interested educators, parents, and community organizations saw a need, were interested in education and wanted to do something different,” said Keith Poston, president and executive director of the Public School Forum of North Carolina, a nonpartisan advocate for better schools and more public funding for education.

Last year, though, 27 schools run by for-profit companies received $118 million in state money. That’s about 23 percent of the state money that went to 167 charters.

“We are seeing fewer and fewer home-grown community charter schools and more and more for-profit chains and models,” Poston said.

The for-profit charter management company National Heritage Academies has opened 11 schools in North Carolina and has two more coming, giving it a presence in the state second only to Michigan, the company’s home base. Eight of the 13 National Heritage schools opened or were approved in 2012 or later, after a 100-school limit on charters dissolved.

Charter Schools USA, a for-profit, Florida-based company, opened its first two North Carolina schools in 2013. It now has six, and is set to open three more next year.


Charter Schools USA and National Heritage Academies are not the only for-profit companies operating charters in North Carolina:

  • Roger Bacon Academy, founded by businessman Baker Mitchell, has four locations. Mitchell’s management company was chosen by the schools’ nonprofit board, which Mitchell was on at the time, according to a 2014 ProPublica article that ran in The News & Observer.
  • A company called Seven Degrees of Change managed Phoenix Academy in High Point, and a company called Torchlight Academy Schools managed a school of the same name in Raleigh.
  • Two online schools, Connections Academy and North Carolina Virtual Academy, have received poor grades from the state.

Here are some of the names to know in the politics and policy surrounding charter schools:

  • State Sen. Jerry Tillman is a former public school administrator and a Republican from Archdale who has pushed for more charter schools and charter-friendly laws.
  • Lt. Gov. Dan Forest is a school-choice proponent and member of the State Board of Education. The legislature has given Forest, a Republican, key roles in choosing state charter school leaders. He was a vocal supporter of online charter schools as those schools were working to finalize their contracts with the state. His general counsel, Steven Walker, is vice chairman of the state Charter School Advisory Board. Forest is expected to run for governor in 2020.
  • Harry Kaplan is a lobbyist for a constellation of charter school companies and charter promoters, including Charter Schools USA, K12 Inc., the Education Freedom Alliance and Parents for Educational Freedom.
  • The N.C. Association of Educators has been one of the most consistent charter critics. The NCAE was on the front lines opposing online charter schools and what’s now called the Innovative School District, a new endeavor that will give up to five low-performing district schools from around the state to charter-school managers to operate. Mark Jewell is the NCAE president.
  • Darrell Allison is president of Parents for Educational Freedom in North Carolina. The organization looks to build public and political support for school choice, and operates a charter-school support program for school leaders.
  • Richard Vinroot is a former Charlotte mayor and Republican candidate for governor who helped start a charter in Charlotte for low-income students. Vinroot, an evangelist for charters, is a lawyer who represented charter schools in lawsuits against school districts over money.
  • Alex Quigley is chairman of the Charter School Advisory Board and runs a charter school in Durham.
  • The Civitas Institute is a conservative public policy group based in Raleigh that supports vouchers, charters, and home schooling.Public Schools First NC, which is active in a variety of education issues, is critical of charters and sees many segregated by income and race. It wants greater accountability for charter schools.
  • Bill Cobey is chairman of the State Board of Education, which decides whether to approve new charters, charter renewals, and charter policies the advisory board recommends.
  • The NC Justice Center, a left-leaning policy organization, wants a moratorium on charter school growth until charters are subject to the same transparency and accountability standards as district schools, are required to provide transportation and free or reduced-price lunch, take steps to promote diversity, serve high-needs students, and are subject to higher levels of scrutiny in the approval process to ensure only high-quality schools are created.

Many of the early home-grown schools failed for financial reasons. Starting a school is expensive, said state Sen. Jerry Tillman, an Archdale Republican and charter school enthusiast. Company-run schools bring money and expertise to a complicated project.

Sen. Jerry Tillman

“They know how to put the money together, ” said Tillman, co-chairman of the Senate Finance Committee. Companies make sure that schools open with the necessary equipment and resources, he said.

Here are four things to know about North Carolina’s for-profit charter schools:

1. They spend less on teachers and staff.

Other than two online schools, charters receive the same per-pupil state payment as the traditional public schools in the county where the charter is based. The local money charters receive is based on how much counties spend per student. Local dollars follow the student and can cross county lines. For example, a charter in Wake County that enrolls Durham students will receive money from Durham based on Durham’s per-pupil spending. Charter schools are eligible for federal funds for low-income students, school lunch, and other specific programs.

Charters don’t receive county money or state lottery revenue for buildings, as school districts do, and cannot use state money to buy buildings. Many charters must pay for space using operating funds or grants.

How can schools turn a profit when they can’t charge tuition and receive no money for buildings?

For one thing, they spend less on employee salaries and benefits.

Charters in North Carolina run by for-profit companies spent an average of $3,593 per student on employee salaries and benefits, according to federal data from 2014, the most recent year available. The data includes information for 13 charters run by management companies.

Charters run by unaffiliated boards and nonprofit networks had average employee costs of $5,672 per student.

Employee costs at public school districts were far higher averaging $7,676 per student, according to the federal data.

Some examples:

▪ PreEminent Charter School in Raleigh, run by National Heritage Academies, had employee salary and benefit costs of $3,824 per student in 2014. Wake County schools’ salary and benefit expenses came to $6,777 per student.

▪ Cabarrus Charter Academy, run by Charter Schools USA, had employee salary and benefits costs of $3,343 per student, while Cabarrus County schools’ employee costs were $6,207 per pupil.

Charters do not have to follow the state pay scales for teachers and other employees, and they don’t have to pay the salary supplements many counties offer. Charter schools don’t have to adhere to state class-size requirements, so they are allowed to hire fewer teachers per student than school districts.

Charter school teachers don’t necessarily need licenses. As much as half of the teaching staff at a charter school may be unlicensed. It’s up to charter school boards whether school employees participate in the state employee health plan or the retirement system, and many schools opt to buy commercial insurance and offer alternatives to state pensions such as 401(k) plans. Charters get the same money as traditional schools do for pensions, but they don’t have to spend it on pensions.

2. For-profit companies make money by renting school buildings.

The lower per-student spending on salaries can leave money available to pay management fees to for-profit companies.

Charter Schools USA says it provides a “turn-key” system for setting up and operating charters that includes marketing schools, selecting classroom materials, hiring, managing contracts and managing board of directors meetings.

Management contracts allow fee payments of up to 15 percent of revenue – which comes out of state and local money – but that peak is rarely reached, Richard Page, Charter Schools USA chief impact officer, said in an email. The company discounts fees to make sure all school expenses are paid first, he wrote.

“We ensure the school has the necessary resources on day one – computers, hardware, infrastructure, desks, chairs, books, etc.,” Page wrote. “All of those costs are supported by CSUSA immediately. Therefore fees are reduced in the beginning and over time, the discount is reduced.” The company and the school’s board decide each year on the fee amount, he said.

The for-profit management companies make money not just through fees, but often by providing school buildings that the local boards of directors rent.

“A lot of people have called it a real estate play,” said Tom Kelley, a law professor at UNC-Chapel Hill. The companies develop the property and then require the board to rent the building.

“The taxpayers are essentially paying the mortgage along with all upkeep and everything,” Kelley said. “And after just a few years, the for-profit company has recouped all the expenses it put in for construction and then it’s just gravy after that. It’s a money tree that just keeps on giving.”

The local boards at Charter Schools USA schools pay annual fees to the company and lease the school furniture and equipment. The boards lease buildings owned by a Charter Schools USA sister company called Red Apple.

National Heritage Academies requires the local boards to hand over the taxpayer money they get, under what are called “sweeps” contracts. The company gives the board a small grant for discretionary expenses, such as single pieces of furniture, art supplies, or to support sports teams, Kelley said. Lease payments are bundled into the money the company takes.

In New York, the National Heritage business model has been criticized:

▪ A 2012 audit of Brooklyn Excelsior Charter School by the New York State comptroller concluded that the school’s 2009 lease required the school to pay 25 percent of its yearly revenue in rent, or $2.57 million. An independent appraisal that year indicated the fair-market rent was $1.78 million a year. By June 2011, the company had recovered more than it paid in acquisition and renovation costs, the audit said, with two years remaining on the lease.

▪ A 2015 audit criticized a lack of transparency in school budgets and company fees for a Syracuse school the company runs. The audit found that in 2011-2012, National Heritage developed budgets to spend all the school’s money no matter how much the company thought it was going to get.

In each case, the school boards told the comptroller they were exercising proper oversight of their finances.

In North Carolina, the boards of National Heritage schools typically pay more to lease their buildings than boards overseeing independent charters. For example, Wake Forest Charter Academy, a National Heritage school, pays more than $1.2 million a year to lease its 44,966-square-foot building, according to an independent audit.

Endeavor Charter School in Wake Forest, which is not run by a management company, paid $792,000 to lease its building last year. According to county records, its building is 38,191 square feet.

The Wake Forest Charter Academy board is paying about $28 per square foot, while the Endeavor board is paying about $20 per square foot.

Nick Paradiso, vice president of partner services for National Heritage, said the company spends $8 million to $10 million to buy land and then build and equip a school so it’s ready for students on the first day. The arrangement means the company takes on the financial risks of opening and operating a school, he wrote.

“We do this before we receive the first dollar of public funding, which means the board has no financial risk,” he said in an email.

In setting lease rates, National Heritage hires a third-party to conduct a market analysis for single-use buildings, he wrote. “That analysis takes in many factors, including location, market demand and use. Schools are single-purpose buildings. They cannot easily be repurposed for another type of commercial use if the school is not successful. These and other factors are taken into account when determining competitive lease rates. The analysis is then presented to the school board by the third party.”

Independent audits show National Heritage contributed money to schools in some years. The company spent $686,340 on Wake Forest in 2016 in addition to public money.

Paradiso did not specify the reasons the company gives money to schools, saying that National Heritage supports schools “with extra contributions to academics when necessary.”

3. For-profit companies have leverage over the local board.

For-profit companies running charters in the state must do so under contract with nonprofit boards of directors that apply to open the schools.

But Kelley, the UNC law professor, said it would be practically impossible for local boards to end their contracts with National Heritage Academies. The boards at National Heritage schools don’t own the property: they lease the buildings, equipment and furniture.

“If they decided they would fire the management company, they would end up with absolutely nothing,” he said.

Kelley researched the contracts for three for-profits running schools and relationships they have with charter school boards and wrote a 2015 article published in the North Carolina Law Review. After examining minutes of boards of directors meetings and other documents, Kelley didn’t find evidence that those charter school boards were digging into school budget details.

In his article, Kelley wrote that National Heritage in its early years in the state presented boards of directors with financial reports that included the line item “purchased management services.”

Over time, that line item disappeared and “financial reports became increasingly convoluted as the number of budget line items multiplied and their descriptors grew increasingly vague.” Board members would need to ask aggressive questions to know exactly how the money was being spent, he said. If board members were asking those questions, meeting minutes didn’t show it.

“There’s no indication that people are asking what budget lines mean, why a budget item doubles,” Kelley said in an interview, while acknowledging minutes don’t always give detailed accounts. “It might be happening. There’s no evidence that I can find.”

Hilda Parler, founder and board president at National Heritage-run Wake Forest Charter Academy, said her board makes all critical decisions for the school.

Parler said in an email that she recruited National Heritage, and the company made it possible for her to realize her dream of starting a school. Wake Forest Charter Academy is a K-8 school that opened in 2014 and enrolls students from Franklin, Granville and Wake counties, with most students coming from Wake.

“We hold the charter and always keep in mind that the board is responsible for all persons and things related to Wake Forest Academy,” she wrote.

“We have the ability to cancel our contract with NHA if we’re not pleased with their performance. Our contract allows us to lease the school, its books, desks, etc. It also has a provision where we could buy the building and its contents if we choose not to continue to employ NHA to manage the school.”

4. Their performance is uneven.

Lt. Gov. Dan Forest, a charter school proponent, said it doesn’t matter that the management companies profit as long as students are learning.

“These guys are in business,” said Forest, a second-term Republican. “They’re performing. They’re doing a good job. They do it for far less money than traditional schools do. Then, yeah, absolutely. Why would you not let people make money doing that?”

Dan Forest

Are the for-profit charters performing? The evidence is mixed.

It’s difficult to tell how they stack up against other charters and traditional public schools because the number of for-profit charters (27 last year) is still small by comparison. There is wide variation in the grades each school earned, which are based mainly on test scores.

One pattern that shows up in the grades: Wealthier schools among the for-profit charters may not do as well as wealthier traditional public schools.

Schools with wealthier students tend to get As and Bs under the state grading system, which generally reflects school poverty. More than half of the wealthier traditional public schools received As or better. Traditional public schools with fewer than 20 percent low-wealth students have never received Ds, and it’s rare for those schools to get Cs.

That’s not the case for wealthier charters managed by for-profit companies. Only nine schools where low-income students make up less than 20 percent of the student body received grades this year, too few to draw clear conclusions. But those were more likely to receive Bs and Cs.

Three received Cs; one, Cabarrus Charter Academy, received a D.

In all, 24 charters run by for-profit companies received state grades this year.

The other 15 schools received two Bs, six Cs and seven Ds.

Lynn Bonner: 919-829-4821, @Lynn_Bonner

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