Mixing profits and performance at alternative schools

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Ombudsman South in Chicago Lawn sits next to a fitness studio in a strip mall.

Photo by Michelle Kenaar

Ombudsman South in Chicago Lawn sits next to a fitness studio in a strip mall.

At a conference held by School Board member Deborah Quazzo’s education investment firm Global Silicon Valley Advisors, fellow board member Mahalia Hines introduced Magic Johnson and highlighted Johnson’s visit to a Chicago alternative school that bears his name.

Hines said the former basketball superstar was moved to tears as he listened to a young man’s story of hardship. “The Magic I know was not afraid to cry,” Hines said. “Not only did he shed tears, he offered him a full [college] scholarship and beyond.”

When Hines handed Johnson the microphone at the conference last spring, his entire speech focused on how he has made money starting businesses in urban areas, returning bigger profits than expected in each case. He didn’t mention the schools for dropouts at all until he was asked a question about his education investments.

“I am an aggressive businessman,” he said, adding later that he cared about doing good while making money. “That is who I am.”

Like Johnson, the executives who run the companies that have opened a string of new alternative schools in Chicago cast their involvement as an altruistic mission to improve the lives of low-income teens.  At a community breakfast this winter at the South Side location of Ombudsman, one of the schools, CEO Mark Claypool told the crowd that the school was about giving the students hope.

“It gives students hope and dignity that life can be better,” Claypool said. “It tells them, I can transcend.”

But as Chicago quickly and dramatically expands these schools—most of which rely heavily on online curricula and appeal to students’ desire to get a diploma quickly—it’s clear that altruism is heavily mixed with profit-making savvy. CPS has invested nearly $60 million in these companies in the past two years, leading to significant profits—including profit based on buying services and materials from the schools’ own affiliated enterprises.

Making money isn’t problematic in and of itself, as one Harvard University expert points out. But the schools raise another concern, he adds: There is no way to know whether the companies will deliver results given the complex goal of educating students and ensuring their diploma has value.

This last of three stories from a Catalyst Chicago/WBEZ investigation reports on a review of financial information for the four companies that have opened 15 schools in the past two years: Camelot Schools ; Ombudsman; EdisonLearning, which owns Magic Johnson Bridgescape Academy; and Pathways in Education-Illinois, the sole non-profit operator, although its executives own for-profit companies that do business with the non- profit.

The financial information is from audits and budgets obtained from CPS by Catalyst Chicago/WBEZ through a Freedom of Information Act request.

Part 1 reported on questions regarding the quality of the new schools. Part 2 reported on the impact of alternative school expansion on the district’s graduation rate.

While the companies were willing to talk generally about their finances, several of the executives refused to talk about their profits.

Public policy, private profit

Chicago’s expansion is part of a national trend of widespread growth in private, for-profit alternative schools. The four companies that have opened schools here operate more than 100 schools in at least 30 states. Other companies are also part of the mix: More than 15 responded to the request-for-proposals issued by CPS to carry out its expansion goals.

When Camelot Schools was acquired in 2011 by Riverside Company, a private equity firm, Riverside’s managing partner noted in a press release: “Alternative and special education has significant growth.”

In the past two years, the companies have received more than $10 million to launch in Chicago, plus about $50 million in per-pupil general funding.

According to Catalyst/WBEZ’s investigation:

  • Company budgets include substantial money for overhead costs and buying services or materials from affiliated companies. As a result, half or less of their funding from CPS pays for teachers and other personnel.
  • As mostly online ventures, the schools operate two or even three sessions a day and can enroll more students without having to pay additional teachers. The exception is Camelot, which has an eight-hour day and less online work.
  • Since the companies are privately owned, the public has little or no way to know who is investing in them—and most importantly, whether or not the companies have any connections to district or city officials.

Issues like these worry critics. “It is very problematic to hand important public policy matters to private corporations that are most concerned with their own profit and not public good,” says Saqib Bhatti, executive director or Refund America, a group at Roosevelt University that is examining Wall Street’s role in government. “We should not have Wall Street exacting revenue that should be going to our schoolchildren.”

Matt Rodriguez, the principal of the 40-year-old alternative school Pedro Albizu Campos Puerto Rican High School, says it’s hard to see how a school can make a profit given the level of support—academic and social—that students in alternative schools typically need.

Like many educators who work with dropouts and at-risk students, Rodriguez feels as though his school barely scrapes by. At the end of the year, he has no financial surplus. Sixty percent of his funding pays for teachers and other staff, enough to keep the student-teacher ratio low. A fair amount is spent on rent. Rodriguez has to rely on outside social service agencies to work with students, who often deal with a host of personal issues.

“It is a shoe-string budget,” he says.

Students at Ombudsman do the vast majority of their work online during half-day sessions.

Photo by Michelle Kanaar

Students at Ombudsman do the vast majority of their work online during half-day sessions.

What about results?

Yet CPS Chief of Incubation and Innovation Jack Elsey points out that the schools fill a vital need. CPS had only 4,000 seats for an estimated 60,000 dropouts, and the new companies were able to come in and start filling that gap. “We looked at the cost of serving these students now and the cost to society [later],” he says. “It is absolutely the right thing to do.”

CPS examines budgets and audits to make sure they are spending properly, Elsey says. But the real test is whether they can help students earn their diploma. “We want to see what the outcomes are,” Elsey says.

If these companies can deliver, then there’s nothing wrong with people making money from investing in them, says John D. Donahue, a leading expert on private-public partnerships and faculty chair of the Masters of Public Policy program at the Harvard Kennedy School of Government.

But Donahue is especially skeptical of for-profit companies that operate schools. In general, he says, having for-profit companies partner with government only works well if outcomes can be measured, payment can be tied closely to accountability and sufficient competition exists to keep the company from getting lazy. He notes, for example, that the for-profit model works well when selling smartphones or movie tickets.

“But when you can’t specify in clear terms what you want–either because the undertaking is complex, as education is, or because it is heterogeneous, as education is, or if you don’t know after the service has been delivered what the quality is–then it won’t work,” he says.

Donahue points out that Illinois does not have a high school exit exam that would ensure that the diploma given to students from alternative schools is meaningful. It’s also worrisome, he adds, that alternative school graduates are counted toward the graduation rate of their original high schools–creating a huge incentive for schools to ship out ‘problem’ students and giving these schools a competitive advantage that is not based on quality.

Given concerns such as these, some states, including Illinois, have barred for-profit companies from running schools. Illinois law requires charters to be non-profits and incorporated in the state of Illinois. But in setting up the new alternative schools, CPS side-stepped that requirement by designating them instead as programs that would be under contract to the office that oversees alternative schools.

That’s a direct departure from previous practice, in which the alternative school department contracted with one or two small schools for specialty populations, like students released from the juvenile detention center and the majority of alternative schools were set up as charters, most of them under the Youth Connections Charter Network.

Just a “tax status”

Ombudsman CEO Mark Claypool and Camelot CEO Todd Bock argue that being a for-profit is not much different from being a non- profit. “It is more a tax status than anything else,” says Bock.

Claypool says he can raise money more quickly as a for-profit company and says he raised “$6 or $7 million” to help build out space in Chicago so that four schools could be ready to open over the past two years. Getting loans or foundation grants to support the venture would have taken much longer, he says.

Investors expect about 10 percent return, Claypool says. He maintains that investors are not yet earning dividends at all from the schools in Chicago. Overall, Claypool says, people are not getting rich. “No one is living in an ivory tower off of these schools,” he says. He declined to disclose his own salary.

In 2014, Educational Services of America, which runs Ombudsman, reported $114 million in revenue serving students in more than 20 states. In the three schools in Chicago, Ombudsman is expecting to make about $900,000 in profit this year.

On top of profits, these companies tuck other expenses into their budgets that appear to help the bottom line more than they do students.

During the 2013-2014 school year, according to their audit, Pathways in Illinois was paid $5.1 million to operate two schools with a total of about 500 students. Altogether, the company paid its affiliates $1.8 million for a range of items, from $800,000 in management services to more than $500,000 for curricula and materials from a for-profit owned by the same people who run Pathways.

Magic Johnson Bridgescape includes $400,000 in its budget for each of its five schools (each with 200 students) for educational materials–$2,000 per student. Much of the money is spent on eCourses, which are also EdisonLearning products. Spokesman Mike Serpe said that the company also buys some other programs that students use and mentions Think Through Math, which is part of Quazzo’s investment portfolio.

In addition, EdisonLearning also pays Johnson simply to use his name. At a press conference in February with Mayor Rahm Emanuel to announce Johnson’s financial support for summer jobs for youth, Johnson said he was approached by EdisonLearning because they wanted to draw inner-city students into their schools.

“What they needed was a guy like myself to come in to more or less brand it,” he to Catalyst/WBEZ. When asked how much he makes per school, he replied, “That is all you need to know.”

 

Problems elsewhere

Since these schools are new to Chicago and Illinois has no high school exit exam or standard end-of-course exams, it is impossible to know if the investment will prove to be worthwhile. But in other districts where such schools have been around for a while, concerns about quality and efficiency have already emerged.

For one, the board of directors for Pathways in Illinois includes a couple who founded and operated a charter school chain that has been banned from operating in Los Angeles, called Options for Learning and Options for Youth. The schools remain in operation in small towns and suburbs in California. At one point, according to the Los Angeles Times, the couple each collected $321,000 in salary for running the charters. In addition, $4.6 million went to for-profit companies owned by the couple.

What’s more, the schools did not produce great results, with only 11 percent graduating.

The couple’s daughter is the executive director of Pathways in Illinois.

In Fulton County, which includes Atlanta, where an Ombudsman school serves students who were suspended, parents are complaining about the lack of instruction and the fact that fewer students are passing fewer end of the year exams.

And just this past February, the school district in Joplin, Missouri canceled its contract with Ombudsman with board members decided that they could do what the company was doing cheaper.

Gary Miron, professor of evaluation, measurement, and research at Western Michigan University, is one of the few academics to have studied privatization of public schools. He says he understands the argument that if for-profit companies can do better at a lower cost, it is acceptable for them to make some money.

“But it is not happening, just not happening,” he says. “If we look at poor-performing schools, [they] should be spending more on instruction.”

He goes on to note that much of this experimentation with new school models is being done with the most vulnerable populations—poor, overwhelmingly minority students.

“If these are such a good idea, why aren’t we doing it with some suburban schools serving middle class families?” Miron says. “Yet we see this experimentation with private companies with pretty drastically new ideas that end up being more beneficial for profit margin than actual performance.”

This story was co-reported with WBEZ’s Becky Vevea.

  • Audrey

    There are plenty of these alternative schools and special education schools in the suburbs. Moreover, the problem is with the State Mandated Categorical Reimbursements to school districts that provides a disincentive for districts to have their own alternatives, or send students to public alternative schools run by cooperatives. There is a rebate of state funding for using the private schools. The private facilities lobby has a lot of influence in Springfield.
    Last year’s debacle, SB16 has been rewritten as the new SB1 — private facilities reimbursement has been left out of the package, unaffected by the “new and improved” funding formulas — draining the districts of needed support.

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  • George N. Schmidt

    Nice reporting. The sad thing is that years ago (and I’ve known them for more than a quarter century) the Alternative Schools Network people made enormous sacrifices for these “at risk” children and young adults. Now, under the leadership of the Vitale Board of Education and craven profiteers like Mahalia Hines and Deborah Quazzo, the entire project which took more than a generation to develop is being infected with the virus of privatization and profiteering. Quazzo and Hines form a truly disgusting hypocritical duo, as we saw at the January Board meeting, when everyone acted as if public criticism of Quazzo’s self-serving profiteering were an evil hurtful thing because, after all, these crooks are so sensitive.

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