The Essence of the Charter School Scam

Charter Schools Outsource Education to Management Firms, With Mixed Results

http://www.propublica.org/article/charter-schools-outsource-education-to-management-firms-with-mixed-results

Charter Schools Outsource Education to Management Firms, With Mixed Results

by Sharona Coutts
ProPublica, April 6, 2011, 10:09 a.m.

Since 2008, an Ohio-based company, White Hat Management, has collected around $230 million to run charter schools in that state. The company has grown into a national chain and reports that it has about 20,000 students across the country. But now 10 of its own schools and the state of Ohio are suing, complaining that many White Hat students are failing, and that the company has refused to account for how it has spent the money.

The dispute between White Hat and Ohio, which is unfolding in state court in Franklin County, provides a glimpse at a larger trend: the growing role of private management companies in publicly funded charter schools.

Contrary to the idea of charters as small, locally run schools, approximately a third of them now rely on management companies -- which can be either for-profit or non-profit -- to perform many of the most fundamental school services, such as hiring and firing staff, developing curricula and disciplining students. But while the shortcomings of traditional public schools have received much attention in recent years, a look at the private sector’s efforts to run schools in Ohio, Florida and New York shows that turning things over to a company has created its own set of problems for public schools.

Government data suggest that schools with for-profit managers have somewhat worse academic results than charters without management companies, and a number of boards have clashed with managers over a lack of transparency in how they are using public funds.

White Hat has achieved particularly poor results, with only 2 percent of its students making the progress expected under federal education law. The company declined comment on the performance of its schools.

White Hat was established in 1998 by a prominent Akron businessman, David L. Brennan, who was a key advocate for introducing charter schools into Ohio. Like most charter schools, White Hat’s Hope Academies and LifeSkills Centers are primarily funded by the state based on the number of pupils they enroll. The contracts between White Hat and the schools now suing allow the company to collect virtually all funds and use them to run the schools.

When White Hat was establishing some of its first schools, a principal invited James Stubbs, a former NASA electronics technician, to join the board of White Hat’s Hope Academy Chapelside.

Stubbs, who sent his three children to Hope Academies and eventually sat on a number of White Hat school boards, said it took several years before some boards began to question why the schools continued to perform poorly. He said that when members started demanding more detailed accounting, the schools and the company began to clash.

“Ultimately, the board is responsible for what happens to the money,” Stubbs said. He said that when White Hat refused to disclose, it put the board in what he saw as an untenable situation. “The management company gets all the money but none of the blame when things go wrong.”

Charles R. Saxbe, the attorney representing White Hat in the lawsuit, said the company has complied with its legal and contractual requirements. He said that public funds become private once they enter White Hat’s accounts.

“If I’m Coca-Cola, and you’re a Coca-Cola distributor or a Coca-Cola purchaser,” said Saxbe, “that doesn’t entitle you to know the Coke formula or find any financial information you’d be interested in learning from the Coca-Cola company. And that’s kind of what they’re demanding.”

“Governing boards are purchasing the service and whatever it takes to deliver that service from White Hat,” Saxbe said. “And if White Hat loses money, that’s their risk. And if they make money, that’s their upside.”

But the boards say that students, not White Hat, carry the greatest risk—the risk of failing in school.

“We give the management company 96 percent of the revenues from the state, and they do not have a transparent means for us to see what’s happening with the money,” said Stubbs. “What I am concerned about is students not doing well under this management company, and that can’t continue,” he said.

The Ohio Department of Education agreed. It joined the lawsuit last fall and asked the court to help the “group of public schools break free from dominance by private interests.”

“Things have not gone well under White Hat’s direction,” the department argued in a court motion. “Most of the schools have received the equivalent of D’s and F’s on their State report cards and their performance has declined during the term of the agreements.”

In fact, White Hat schools across the country are performing poorly, according a reportby the National Education Policy Center, a nonpartisan research organization based at the University of Colorado, Boulder. Of the 51 schools White Hat managed in 2010, only one met a key standard established by the No Child Left Behind law—called “Adequate Yearly Progress.” According to the report, that is by far the worst performance of any large for-profit management company. The company did not answer questions on the performance of its schools.

Adequate yearly progress is a “crude indicator” of success, according to Gary Miron, professor of education at Western Michigan University, who co-wrote the report. But he said it does at least show whether schools are meeting state standards.

“When you compare 2 percent of White Hat schools meeting AYP, that's just something that cries out that there's something awry here,” he said. “Even schools in poverty are going to have a much higher rate of meeting AYP.”

Despite the poor performance and the lawsuits, White Hat is still managing the schools under a contract extension that expires this summer.

Because White Hat owns most of the schools' property and employs the staff, the boards worry that they could not survive a sudden rupture with the company.

“A big part of the argument here is being able to follow the money,” said James D. Colner, an attorney representing the schools. “We have no idea whether they’re earning a reasonable profit or not. We have no idea whether the money is being efficiently or effectively spent for our students,” he said.

As federal and state governments pour billions of dollars into charter schools, boards across the country have increasingly turned to companies such as White Hat. Roughly a third of all charter schools now contract with “full service” management companies, which control hiring and firing, enrollment and curriculum at these public schools, according to Miron.

Yet the results have been decidedly mixed, with increasing complaints that some companies have put profit ahead of education and have often become unaccountable to the school boards that are supposed to represent the interests of the community and children.

“I’m seeing increasing problems with boards not having access to information,” said Miron. “The boards have less authority because so many things are sewn up by the management company.”

While a lack of transparency does not always lead to poor performance, experts see it as a red flag for possible problems.

About half of charter schools with for-profit management companies met their adequate yearly progress targets, according to the National Education Policy Center’s report, which used the most recently available information. By comparison, 63 percent of charter schools overall and 67 percent of regular public schools met the benchmark in 2009, according to the National Alliance for Public Charter Schools, an industry group.

“There's not always a direct link between how well a school is managed and how well kids learn, but often a school that is mismanaged will have bad academic results,” said Alex Medler, vice president of policy and research at the National Association of Charter School Authorizers, a nonpartisan group that advises policy-makers and regulators. “Transparency is a symptom of healthiness that lets a bunch of other mechanisms work the way they should.”

There can be good reasons for charter school boards to hire management companies. “The idea is to make a contract with someone who has the skills to hire people, find a building and put a school together,” said Henry Levin, Professor of Economics and Education at Columbia University’s Teachers College. And indeed, some charter schools overseen by management companies have flourished.

But oversight of the industry has lagged, resulting in a patchwork of state and district regulation, which experts say is failing to safeguard the interests of children and taxpayers.

Some states do not directly oversee either the company or the board and do not regulate the terms of their contracts. In many cases, the bulk of the oversight is left to “authorizers,” organizations empowered to green-light charter schools. Some states have many authorizers—which can include tiny nonprofit organizations—while others entrust the task to public universities, local districts or other specially created entities, many of which lack the resources needed to effectively carry out their role, according to Columbia’s Levin.

That’s led to what Levin called “a lot of confusion.”

“There’s an awful lot of diversity in these companies,” he said. “And most of them are proprietary, so we really don’t know how they’re operating.”

Schools in other states have also asked the courts to help them rein in what they see as unaccountable management companies.

In Florida, Paragon Academy of Technology and Sunshine Elementary Charter School fired the Leona Group, a Phoenix-based management company, in August 2009 when Leona unilaterally dismissed the school’s principal and made other management decisions without seeking board approval, according to legal filings.

The Leona Group promptly sued in Florida state court in Broward County, arguing that the schools had wrongly terminated the agreement and that the company had loaned the schools $180,000 to keep them afloat. Michael R. Atkins, the management company’s general counsel, said Leona is seeking to recoup those funds and wants a resolution that allows the schools to continue to operate.

The schools counter-sued, arguing that Leona “failed or refused” to produce a range of documents, including staff and teacher contracts, and bank account statements. Leona ignored requests to return their property, including “the master key for the school facilities and all electronic and hard-copy school records and documentation,” according to the schools’ complaint.

Two board members of Leona-managed schools in Florida told ProPublica that they had trouble finding out how Leona was spending their money from the time the company took over the schools in May 2008.

“It was very difficult and very confusing,” said Mark Gotz, who has served on the boards of numerous charter schools in Florida and considers himself a charter school advocate. “I would ask questions about the numbers, what they related to, what numbers were relative to what services were being provided, and in the information that was given to us, neither myself nor the accountant for Leona could dig it out.”

Leona said it could not comment on the board members’ claims, saying they involved employees who have since left the company. According to a spokeswoman, Leona has contracts with 50 schools across five states, serving 18,300 students. A number of Florida schools that once worked with Leona no longer contract with the company—including two schools in Pompano Beach that settled litigation with Leona late last year.

Even when schools and companies are able to settle their disputes, the lawsuit settlements are often confidential, leaving many questions unresolved.

The Rochester Leadership Academy Charter School was closed in 2005 by the State University of New York, for poor academic performance. In August 2009, the charter school’s board sued National Heritage Academies Inc., the school’s for-profit management company, in Monroe County, NY, arguing the company failed to provide the “management, operation, administration, accounting and education” it promised under the contract and caused the school to lose its charter—effectively killing the school.

The school claimed that National Heritage, which operates 67 schools with 42,000 students in eight states, had “failed to account and conduct financial reporting” and cost the school over $2 million.

The parties reached a confidential settlement last March. As local TV news reported, parents and community members were angered that they were not told what had happened with whatever funds, if any, that had been recovered from National Heritage.

The school’s former director could not be reached, and lawyers for the school and National Heritage told ProPublica that the confidentiality agreement prevented them from commenting on any aspect of the case.

Despite the difficulties encountered by some schools, many have positive relationships with their management companies. A key factor is the presence of a strong and independent school board, according to Medler, of the National Association of Charter School Authorizers.

“The independent group holds the management company accountable,” he said. It makes no difference whether the company is for-profit or nonprofit, he said, so long as the board’s interest is “the success of the school, not the success of the management company.”

Recent events at Imagine Wesley International Academy in Atlanta, GA, illustrate the difference that a strong board can make.

Imagine has been featured in local and national news reports about problems at its schools. It was the focus of a New York Times story that raised questions about how Imagine’s founders, Dennis and Eileen Bakke, were spending public funds, and about their related company, Schoolhouse Finance, which had numerous real estate transactions involving the schools.

The problems at the company led to conflicts with school boards and hampered its efforts to open schools in states including Florida and Texas, according to the Timesstory.

In 2009, the Georgia Department of Education determined that Imagine’s school boards were not truly independent. The company was forced to reconstitute its boards, which, in the case of Wesley, actually improved the relationship between the company and the school, according to David Walker, a business attorney who became chair of Wesley’s board in the summer of that year.

“There were a lot of things that were out of whack when we came on board,” Walker said. The school was paying for teachers, benefits, the lease, as well as a percentage for Imagine’s fees, but it wasn’t clear what services Imagine performed for the fees, and many aspects of the agreement were ambiguous, he said.

Imagine’s spokeswoman did not comment directly on Wesley, but she said the company operates within industry standards for administrative costs.

The new board, which includes attorneys and professionals, as well as active parents, renegotiated the management agreements and the leases, listing specific services that Imagine must provide to the school, and how much each will cost.

Walker said his two daughters are flourishing at Wesley, which offers Chinese-language as well as single-gender classes.

“We’re happy with what’s going on at Wesley,” he said. “The charter school allows the community to have so much input on their child’s education. I’m more comfortable sending them to Wesley instead of some of the best private schools.”

Clarification: We have added language to better explain that some management companies that work with charter schools are non-profits.

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