California Virtual Academies: Is online charter school network cashing in on failure?
by Jessica Calefati, Bay Area News Group/San Jose Mercury News | http://bayareane.ws/1SgVshb
What our investigation found:
- Teachers employed by K12 Inc.'s charter schools may be asked to inflate attendance and enrollment records used to determine taxpayer funding.
- Fewer than half of the students who start the online high schools earn diplomas, and almost none of them are qualified to attend the state's public universities.
- K12's heavily marketed online model has helped the company reap more than $310 million in state funding over the past 12 years.
- Students who spend as little as one minute during a school day logged in to K12's school software may be counted as present in records used to calculate the amount of funding the schools get from the state.
- About half of the schools' students are not proficient in reading, and only a third are proficient in math -- levels that fall far below statewide averages.
- School districts that are supposed to oversee the company's schools have a strong financial incentive to turn a blind eye to problems: They get a cut of the academies' revenue, which largely comes from state coffers.
- Documents: Records show the California Virtual Academies schools are established and run by Virginia-based K12 Inc.
4/17/2016 04:59:01 AM PDT Updated: 4/18/2016 05:00:42 AM PDT :: The TV ads pitch a new kind of school where the power of the Internet allows gifted and struggling students alike to "work at the level that's just right for them" and thrive with one-on-one attention from teachers connecting through cyberspace. Thousands of California families, supported with hundreds of millions in state education dollars, have bought in.
But the Silicon Valley-influenced endeavor behind the lofty claims is leading a dubious revolution. The growing network of online academies, operated by a Virginia company traded on Wall Street called K12 Inc., is failing key tests used to measure educational success.
Fewer than half of the students who enroll in the online high schools earn diplomas, and almost none of them are qualified to attend the state's public universities.
Elizabeth Novak-Galloway, 12, who used to be an A student, received C's because she was missing work she never knew had been assigned, her mother said. (Dai Sugano/Bay Area News Group)
An investigation of K12-run charter schools by this newspaper also reveals that teachers have been asked to inflate attendance and enrollment records used to determine taxpayer funding.
Launched with fanfare and promise, online schools such as K12 are compiling a spotty record nationwide, but highly motivated students with strong parental support can succeed in them. In California, however, those students make up a tiny fraction of K12's enrollment. The result -- according to an extensive review of complaints, company records, tax filings and state education data -- is that children and taxpayers are being cheated as the company takes advantage of a systemic breakdown in oversight by local school districts and state bureaucrats.
At the same time, K12's heavily marketed school model has been lucrative, helping the company rake in more than $310 million in state funding over the past 12 years, as well as enriching sponsoring school districts, which have little stake in whether the students succeed.
"Sometimes I feel like a terrible parent for enrolling them," said Carol Brockmeier, a single mother from Santa Clara whose teenage daughters for a year attended K12's San Mateo County-based academy, which serves an area stretching from Santa Cruz to San Francisco.
K12 is the nation's largest player in the online school market. In California, it manages four times as many schools as its closest competitor, filling a small but unique niche among the state's roughly 1,200 charter schools. And despite a dismal record of academic achievement in California and several other states -- including Ohio, Pennsylvania and Tennessee -- the business regularly reports healthy profits. "This company has shown an inordinate level of failure, yet it's continually given lifelines by policymakers who have irresponsibly ignored what's going on," said Luis Huerta, a Columbia University associate professor of education and public policy who is one of the nation's leading experts on online education.
Taking a closer look
K12 was launched in 2000 by Ronald Packard, a former Goldman Sachs banker, and William Bennett, U.S. secretary of education under President Ronald Reagan, with seed money from Oracle chief executive Larry Ellison and disgraced junk bond king Michael Milken.
The company opened its first California Virtual Academies in San Diego, Kern and Tuolumne counties 14 years ago and has watched enrollment in the 17 schools it operates grow from several hundred students in 2002 to more than 15,000 today. Under state law, each academy may enroll students who live in adjoining counties. That means California children who live almost anywhere south of Humboldt County can sign up for one of K12's schools.
To understand how the network of online academies operates, this newspaper reviewed hundreds of pages of education and tax records, examined complaints filed with public agencies and lawsuits, and interviewed dozens of parents, teachers and students affiliated, or once affiliated, with the schools. The investigation found:
• Students who spend as little as one minute during a school day logged on to K12's school software may be counted as present in records used to calculate the amount of funding the schools get from the state.
• About half of the schools' students are not proficient in reading, and only a third are proficient in math -- levels that fall far below statewide averages.
• School districts that are supposed to oversee the company's schools have a strong financial incentive to turn a blind eye to problems: They get a cut of the academies' revenue, which largely comes from state coffers.
• Michael Kirst, president of the State Board of Education, worked for K12 as a consultant before Gov. Jerry Brown appointed him to the post in 2011. In March 2015, the board voted against shuttering a school run by the company that California Department of Education staff said should close because it was in financial disarray, marking the only time such a recommendation has been ignored.
K12 repeatedly declined this newspaper's requests to interview its executives about its California schools' academic programs and finances, citing an ongoing investigation by Attorney General Kamala Harris into California's for-profit online schools. In a series of emails, however, K12 spokesman Mike Kraft defended the schools' academic performance, arguing that "they will not have the same test scores as schools in high-funded districts with favorable demographics."
"Many families choose online schools because they are fleeing a school or situation that wasn't working for their child," wrote Kraft, K12's vice president for finance and communications. "Their academic performance expectations should be put into context."
Students' struggles
K12's virtual schools have no classrooms, no buildings and no routine face-to-face interaction between teachers and students. Instead, teachers sign on mostly from home and connect to students over the Internet.
"Being in this school can feel so lonely," said Alexandria Brockmeier, 17, who asked her mother to enroll her in an online school in late 2014 because she felt she didn't fit in at Santa Clara High School.
Her school day began whenever she booted up her computer and logged on to the company's programs. Since all lectures are recorded and can be listened to later, the students aren't required to attend class or participate in real time. So, Alexandria said, she rarely did.
If questions popped up while she was working independently, she would often email her teachers seeking help. But Alexandria said they didn't always respond and weren't always available to tutor her one-on-one, even though the company heavily promotes personal attention in advertisements.
Kraft, K12's spokesman, said the schools' policy is for teachers to reply to student emails within 24 hours on school days, but most responses take far less time. Occasionally, however, responses take longer -- for example, when teachers are out sick or on leave, he said.
Alexandria had been failing several of her classes when, in January, she suddenly lost access to K12's software. Her mother, Carol, said she learned the following day that Alexandria and her sister, Jenna, had been locked out without warning because they'd fallen so far behind in their schoolwork.
"I'm disappointed in myself, my kids and this school system," said Carol, who works full time at Mission College in Santa Clara and has been raising the girls on her own since her husband died in 2011 from early onset Alzheimer's disease. "I'm stressed to the nth degree."
As a special education student, Jenna -- before she and her sister were forced to withdraw -- was supposed to receive extra time to complete assignments and extra support from teachers. But, her mother said, she didn't get it, and that made things even tougher for Jenna, 15.
"If I could stay home with the kids and say, 'OK, let's do this lesson,' maybe it would have worked out for them," Carol said.
Jenna isn't the only K12 student in California who has gone without special education services, according to formal complaints filed by academy teachers with local school districts and county offices of education last year seeking investigations into the adequacy of special education provided by K12 schools. The services students are being denied range from speech therapy to counseling to daily in-person tutoring, the complaints allege.
Kraft said the company believes the complaints are "without merit."
Not all parents and students are dissatisfied with the K12 model, which can work for highly motivated and closely monitored students such as Lillian Lewis, an 11-year-old Pleasanton gymnast who trains at least six hours a day and dreams of competing in the Olympics. That discipline, along with support from her parents, makes her a good fit for her online school, California Virtual Academy at San Joaquin.
"We didn't know what to expect at first, but so far it's working out great," said Lillian's mother, Milly, who signed her up last summer.
Elizabeth Novak-Galloway, 12, center, seen with mother Gabriela Novak and sister Kira, 8, was pulled from a K12 school by her mom. (Dai Sugano/Bay Area News Group)
But most students who end up in online schools are far less successful.
Gabriela Novak says she pulled her daughter Elizabeth from K12's San Mateo County school after a year because the difficulty communicating with her overworked, disorganized teachers was maddening. Throughout sixth grade, Elizabeth's teachers repeatedly assured her mother and Elizabeth that she was all caught up with her assignments.
But at the end of the year, her report card showed several C's because she was missing work she never knew had been assigned, her mother said. The experience shot the confidence of the onetime A student and left her desperately behind her peers academically when she enrolled in a San Francisco Unified brick-and-mortar school.
"She doesn't believe in herself anymore," Novak said. "We're trying to get her back on track, but it's not going to be easy."
Kraft said that since parents and students can track online classwork in "near real-time," the final grades shouldn't have come as a surprise.
Widespread problems
It's not uncommon for students to struggle in online schools such as the ones run by K12, said Gary Miron, a professor of education at Western Michigan University and another leading expert in online education. He pointed to a study published in October by a research group called Mathematica that found the vast majority of students in online schools suffered because of the lack of a structured learning environment where live classroom attendance is required.
"A school that requires such little contact with teachers might be appropriate for students at the graduate level," he said, "but it's surely not appropriate for students in kindergarten through 12th grade."
Kraft confirmed that the company's schools do not require "live attendance." Instead, he said, teachers work with students to develop a program that fits their individual needs.
A scathing report published in October by Stanford University's Center for Research on Education Outcomes, or CREDO, found that most online charter students across the country had far weaker academic growth than their peers in brick-and-mortar public schools.
Each 180-day school year, students are supposed to gain an equivalent number of days of learning in each of their core subjects as measured by standardized state tests. Instead, online charter students nationwide are advancing the equivalent of only 108 days in reading compared with their peers. And they're not advancing at all in math.
The students are learning so little in that subject that it's as if they hadn't attended a single math class all year. And in California, the Stanford report shows, the students attending online schools such as those operated by K12 and other smaller companies are falling 58 days of math instruction behind their peers rather than advancing 180 days.
'Shocking' numbers
"Some of these numbers are pretty shocking," said James Woodworth, a senior research analyst at CREDO who noted that these learning deficits are the largest the group has ever recorded in any of its research on different types of charter schools over the past 15 years.
Nationally, 70 percent of students enrolled in online charters attend schools managed by for-profit companies such as K12 and its leading competitor, Connections Academy, while 30 percent attend charters that are independent or run by nonprofits.
Kraft criticized the Stanford report's methodology, pointing out that it did not account for how late in the school year online students might have enrolled or the reasons they left their local districts. In addition, he said, the students that K12 schools serve are generally more at risk, more disadvantaged and more likely to enter online charters after having struggled or failed in traditional schools.
A report last year by the Colorado-based National Education Policy Center, however, shows that the share of online school students across the country who are living in poverty, struggling with a disability or learning English as a second language is substantially lower than the national average for all public schools. And an analysis of the most recent state data by this newspaper shows that K12's schools actually enroll fewer low-income students, English language learners and students from minority groups than public schools as a whole.
K12's California Virtual Academy at San Mateo's graduation rate is 39 percentage points below the statewide average of 78 percent, and none of the graduates met the entrance requirements for enrollment at a University of California or California State University campus, according to data collected by the state over a five-period ending in the 2013-14 school year.
K12's other 16 schools graduated a total of only 56 students who met the requirements. Across the state, just under half of all public school graduates meet the standards. Kraft said so few of K12's students met the requirements because UC and Cal State don't accept arts and laboratory science courses completed at virtual and home schools. As a result, students must seek out alternative routes to qualify such as SAT and Advanced Placement tests or community college courses.
Asked why graduation rates at the company's schools dip far below the state average, Kraft said the types of students who enroll often arrive off track for graduation. He provided the newspaper figures that are not tracked by the state to show that the graduation rate in 2014 for roughly 200 students who remained enrolled all four years in K12-run California schools is much higher -- 79 percent.
"By accepting all students, even those already well behind pace for timely graduation, online public schools are serving an important mission but may have a substantially negatively impacted graduation rate," he said.
Attendance policy
Some K12 teachers point to the school's attendance policies to explain students' lack of learning.
A handbook distributed to teachers at the start of the school year says attendance credit may be given even if "very few lessons are completed daily," so long as the student is "actively engaged in completing assigned schoolwork."
In a training session during the last school year, a California Virtual Academies administrator told teachers that students need "at least one minute of attendance in order to satisfy the attendance portion of our requirement," according to a recording of the training obtained by this newspaper.
The lenient policy may have more to do with funding than keeping the truancy officer off students' backs. State funding for California schools is based on a metric known as "average daily attendance." The closer schools get to perfect attendance, the more money they receive.
Funding is linked to attendance instead of enrollment because research shows a strong association between showing up at school and success in class. Students who are chronically absent are more likely to drop out, become unemployed and end up on welfare, according to a report on truancy released in February by the state Attorney General's Office.
Kraft said it was "incorrect" that the academy allowed students to log on for only one minute for a day's attendance. He said that teachers are trained to review each student's work and determine how many days of attendance to credit. Still, several teachers interviewed by this newspaper confirmed the policy, and in June a group of them filed formal complaints with local school districts and county offices of education seeking investigations of the schools' attendance practices.
"One minute of work establishes attendance at this school, and in my many years as an educator, I've never heard of that," said Ellen Welt, of San Jose, a former California Virtual Academy at San Mateo teacher. She resigned last summer out of frustration with some of the school's policies.
Julianne Knapp, who teaches at the San Mateo County school, said she also thinks her students would be better off if participation in class were required. She said only a fraction of her 75 or so students regularly attend class, and she has no way of knowing if the others watch her recorded lessons.
"A minute a day is not OK with me," said Knapp, who boots up her computer from her home in Campbell or a cavernous meeting room at a nearby public library to teach students through a virtual blackboard.
Under California law, a student is considered truant if he or she is absent without a valid excuse more than three days in a school year. A student who misses 18 days of school or more is considered chronically absent and would be flagged for intervention.
In separate complaints filed in June, the teachers seek investigations into the schools' withdrawal policies because "many students who are not sufficiently attending school stay on the rolls with no action taken to withdraw them."
Kraft disputed those complaints, insisting "California Virtual Academies follow state rules and regulations regarding the reporting of student attendance and the enrollment of students in its schools."
Since the teachers filed their complaints and the attorney general started investigating, the company has been cracking down harder on students, such as the Brockmeiers, who were chronically absent, Knapp said.
But during the last school year, she taught a student who was absent for 45 days straight, yet she was unable to remove him from her rolls or help him find another school that might have been a better fit. School administrators wouldn't allow it, she said.
"For all I know, he was reading Russian novels this whole time," Knapp quipped. "In reality, he wasn't learning anything, and that's not fair to him."
Julianne Knapp, who teaches for the K12-run San Mateo County school, works alone, instructing her online students through a virtual blackboard. (Dai Sugano/Bay Area News Group)
Districts benefit
In California, bureaucrats don't monitor the day-to-day operations of charter schools. Instead, state law requires districts that vet and approve charter applications to oversee the schools once they open. But there are no guarantees -- and no monitoring from the Department of Education -- to assure that is happening.
Jefferson Elementary School District is responsible for overseeing California Virtual Academy at San Mateo's operations, and the duty comes with a reward. The school has paid the district more than $1 million in oversight fees since the small Daly City-based school system approved the academy's application in 2006, allowing it to enroll students of all ages who live in San Francisco, San Mateo, Santa Clara and Santa Cruz counties.
Larger schools pay even more. The Los Angeles academy, which enrolls quadruple the number of students as the San Mateo academy, typically pays the West Covina Unified School District more than $1 million a year.
The academy in San Joaquin County -- where Alameda and Contra Costa county students may enroll -- has paid $763,000 to its sponsoring district since 2007. The Sonoma County academy, which serves students in the North Bay, has paid its sponsor $889,000.
Regular charter schools often pay similar fees, but their authorizers are more inclined to take the job seriously, experts say, in part because they have a financial incentive. San Jose Unified, for example, oversees brick-and-mortar charter schools that serve students who might re-enroll in the district's schools and bring their per-pupil state aid with them if the charter fails. Districts that oversee online schools are looking after kids who hail from dozens of districts and who can become as invisible as the schools themselves.
In an interview last year, Jefferson Elementary Superintendent Bernie Vidales conceded that he knew very little about the online school for which he's responsible. Vidales said he wasn't sure how many kids were enrolled, where they lived or even how well they had done on the last round of state tests -- even though the California Charter Schools Association insists state law requires authorizers to monitor student performance closely.
The test results are easily accessible online. During the 2012-13 school year, the last before California switched to a new state test, California Virtual Academy at San Mateo earned an Academic Performance Index score of 747 -- below the state average of 791 and Jefferson's average score of 815. The academy's rating also ranks lower than each of the district's 15 schools.
Vidales acknowledged that Jefferson Elementary is paid to look after the online school. With close to 1,000 pupils, it is easily the largest school the 6,000-student district oversees. But, he said, the district did little more than review the academy's budget and make sure it has enough cash to cover costs.
In February, despite concerns raised by the school community, the Jefferson Elementary school board voted unanimously to approve the school's charter to stay open another five years. At the meeting, it asked no questions after Vidales endorsed the school's "reasonably sound education program with appropriate metrics to measure progress" and told the board he had turned down the school's offer to supply documentation about its business practices because its auditors' word "was sufficient for us, at least for me."
When the newspaper asked Vidales last year about the district's obligation to regulate the charter school, Vidales pinned the responsibility on the state.
"The biggest action we could take would be raising a red flag," Vidales said.
But Cindy Chan, director of the California Department of Education's Charter Schools Division, disputed this interpretation of state law and said the reverse is true: Authorizers such as Jefferson Elementary, not state bureaucrats, are primarily responsible for overseeing online schools.
"We support robust regulation," but "when it comes to charter schools, state law provides (us) a very limited role," Chan said.
When the newspaper last week asked Vidales about the state's position, he agreed with Chan in part, acknowledging that the district would be required to address problems at the school, but he still believes the onus to investigate rests outside the district.
This disconnect exposes several gaps in state law, said Myrna Castrejón, who had been the California Charter Schools Association's senior lobbyist before accepting a position in January as executive director of a charter advocacy organization called Great Public Schools Now. Schools that want limited oversight can seek approval from hands-off school districts, and no matter how little oversight the districts perform, most still get paid, she said.
One glaring example: In Southern California, a tiny district with 35 pupils called Spencer Valley Elementary is responsible for overseeing the more than 3,000 students who attend California Virtual Academy at San Diego.
Leniency in oversight
Another online academy's overseer has been especially forgiving.
A few years ago, the California Charter Schools Association publicly called for California Virtual Academy at Kern to close because of low test scores. The request came three years after an investigation launched by the Kern County superintendent of schools revealed the school had falsely reported its teacher-student ratio on forms used to determine state funding, resulting in an overpayment of about $1 million.
But instead of closing the school, Maricopa Unified School District, the authorizer, allowed the academy to simply change its name to California Virtual Academy at Maricopa.
"Right now, we have no way to hold our authorizers accountable," Castrejón said. "And that's a problem."
When the State Board of Education had the opportunity to revoke the charter of one of K12's schools last year because of problems with its finances, something unprecedented happened. For the first time since California's first charter school opened almost 25 years ago, state board members, including President Michael Kirst, ignored their staff's recommendation to shut down the school and instead granted K12's San Francisco Flex Academy -- a school that combines online and regular instruction -- an additional five years to operate.
Kirst, professor emeritus of education and business administration at Stanford University, sat on K12's Education Advisory Committee -- reporting between $1,000 and $10,000 of income in 2010 -- before severing his ties to the company shortly before Brown appointed him to the Board of Education in 2011.
As part of his work for the company, Kirst spoke on behalf of K12's San Mateo County school, among others, at public meetings. But he repeatedly declined to speak to this newspaper about K12's track record in California.
Knowing that California's top education officials supported the company responsible for her daughter's academic woes makes Gabriela Novak's blood boil.
"We trusted them," she said, "and we feel totally betrayed."
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K12 Inc.: California Virtual Academies' operator exploits charter, charity laws for money, records show
By Jessica Calefati, jcalefati@bayareanewsgroup.com Bay Area News Group | http://bayareane.ws/1MDNvWG
Posted: 04/18/2016 04:48:09 AM PDT | Updated: about 2 hours ago
Frustrated with the quality of their neighborhood schools, parents, teachers and civic leaders have founded hundreds of California charter schools, combining locally sourced ingenuity with the public funding that state law allows them to command.
California's largest network of online academies is different: Although the schools are set up like typical charters, records show they're established and run by Virginia-based K12 Inc., whose claims of parental involvement and independent oversight appear to be a veneer for the moneymaking enterprise.
The company -- the subject of a two-part investigative series by this newspaper -- says the schools operate independently and are locally controlled. But the academies' contracts, tax records and other financial information suggest something entirely different: K12 calls the shots, operating the schools to make money by taking advantage of laws governing charter schools and nonprofit organizations.
"What this company has done may make sense from a business perspective, but to me, it's a sham," said Renee Nash, a business and tax attorney and a member of the Eureka Union School District's Board of Trustees.
"K12 is clearly taking advantage of the laws in California," she said, "and the Legislature needs to put a stop to it."
California law is silent on whether for-profit firms are even allowed to run charter schools. So before applying 14 years ago to open the state's first online academies, K12 treaded cautiously into a new market, creating a series of nonprofit organizations whose names match those of the schools.
That means each California Virtual Academy is considered by the IRS to be a charitable organization that need not pay taxes, even though K12 effectively controls the schools by providing them with all academic services.
The structure, accounting experts say, makes it tough to tell where the nonprofit ends and where the company begins. Mike Kraft, K12's vice president for finance and communication, disputes that characterization. He said the nature of the relationship between the company and the schools is articulated clearly in documents.
"The contracts between K12 and each (academy) outline the parties' obligations and expressly provide that the governing body of the school retains final decision-making authority and full control," he said. Still, Kraft acknowledged that K12 personnel "may at times provide newly forming boards that lack any staff with administrative assistance on the organizational documents."
Tax and education records show that K12 employees started each of more than a dozen online academies in California, even though the applications they filed to open the schools described the founders as a "group of parents," none of whom were named. For several years, company employees even signed the nonprofit schools' tax filings.
'The law is clear'
Federal tax law prohibits charitable organizations from operating to benefit a person or company. And to that end, the online academies' articles of incorporation vow that the schools' money won't be used to enrich "any shareholder or individual."
"The law is clear: Charities may not use their resources to promote a business, even if that business' services are helpful," Eric Gorovitz, a San Francisco attorney who specializes in nonprofit tax law, said, speaking generally about charitable organizations. "And if the violation is bad enough, a charity could lose its exemption."
According to the nonprofit's application for tax-exempt status, California Virtual Academy at San Mateo has a board of directors whose members should be willing to cut ties with the company if they feel the school is getting a raw deal. Indeed, the application specifies that all agreements between K12 and the school are the result of "arm's-length" negotiations.
But a review of minutes from the 2014-15 school year's board meetings and records of the board's relationship to administrators hand-picked by K12 suggest the board has little or no independence from the company. A K12 employee led the board meetings, and all 35 resolutions she encouraged the board to endorse won unanimous approval.
The board's open public meetings are held during the workday in a conference room or around an administrator's desk in the Daly City-based Jefferson Elementary School District, which authorized the academy's charter. And board members rarely attend the meetings in person. They usually just call in from home.
All told, the board spent an average of 13 minutes in each meeting.
The board has four members. Two of them, President Don Burbulys, a resident of Soquel, in Santa Cruz County, and Stephen Warren, the board's secretary, who lives in Riverside County, are related to high-ranking school administrators, who, under K12's contract with the academy, are selected by the company.
Burbulys is married to Laura Terrazas, dean of student services, and Warren is related to Academic Administrator April Warren, according to a brief filed by teachers. Terrazas and April Warren on Sunday did not return calls or emails seeking comment. Burbulys, Stephen Warren and the board's other two members have also declined requests for comment.
When K12 sought approval in 2009 to open a charter school for Contra Costa County students that featured a mix of online schooling and traditional classes in a brick-and-mortar setting, Mt. Diablo Unified School District denied the application, citing concerns about the company's role in running the proposed school day to day.
"Not only does the charter school delegate all charter school-related operations, management and administrative functions to K12 California, but it inappropriately gives K12 California control over areas that should be the responsibility of school site staff and the charter school's governing board," the Mt. Diablo school board wrote in a report.
But Contra Costa County, as well as Alameda County residents, can still enroll in a K12 school because there's a California Virtual Academy in San Joaquin County, and the state allows online students from adjoining counties to enroll.
A close look at the contract between California Virtual Academy at San Mateo and K12 raises questions about why a truly independent board of directors would ever agree to the terms, said Luis Huerta, a Columbia University expert on online schools.
Under the contract, which Huerta reviewed for this newspaper, K12 handles almost every aspect of the public school's operations. It's responsible for writing curricula, hiring principals, recruiting students and much more. In exchange, the company is entitled to compensation that can amount to as much as 75 percent of the school's public funding.
Jefferson Elementary school trustees and administrators are tasked with reviewing the contract, but no state agency is required to examine it.
The school's application for tax-exempt status states "the charter school determined that it paid no more than fair market rate for the services." Yet in a bizarre twist, the rates outlined in the contract routinely exceed what the school can afford -- by more than 25 percent.
K12 requires all its California academies to pay only what they can without going into debt. The company then issues "credits" to cover the balance.
California Virtual Academy at San Mateo, for example, hasn't been able to pay its bill in full in a decade. So since 2007, K12 has given the school $8 million in credits. Over the past 10 years, the company has doled out more than $130 million in credits to all the California schools it operates.
Unique arrangement
Accountants and financial analysts interviewed by this newspaper, including several who specialize in school finance, say they've never seen anything quite like the arrangement between K12 and the public online academies.
"If the schools can't cover their expenses and need K12 credits every year to balance their budgets, then the contingent liability to K12 just keeps growing," said Charlene Podlipna, an accountant who works for Freeman & Mills, a Los Angeles-based litigation consulting firm.
Writing down the operating losses of the schools it manages in California and across the country has allowed K12 to reduce its taxable income by $179.5 million over the past three years, according to the company's most recent annual report. That raises questions about why K12 consistently charges more than the schools can pay.
Kraft insisted the company doesn't receive a tax deduction for forgiving the debts of the schools it operates. But when the newspaper presented Kraft with K12's most recent Securities and Exchange Commission filing and asked him to explain whether K12 wrote off the losses, his answer was hardly straightforward: "A company's tax provision is based on its net income. A component of net income is the revenue that a company records. Anything that increases or decreases revenue, and ultimately impacts net income, would therefore impact the taxes owed by that company. K12 is no different than any other company in this respect."
Katrina Abston, K12's senior head of schools for the academies, defended the credits, saying they "provide a high level of protection" for the schools against financial uncertainties.
Huerta, however, said taxpayers could lose out in the end.
Typically, he said, any extra taxpayer funding on hand when a charter school shuts its doors is returned to the state's general fund. But tucked away on one of the final pages of the K12 contracts is a clause that requires a school that's closing to repay the company with any money it has left -- meaning it's highly unlikely the state would recoup anything.
"These companies are exploiting the gray in the law and using clever legal teams to skirt public accountability," Huerta said. "Taxpayers and policymakers should be alarmed."
To address some of the thorny problems that can crop up when for-profit companies run nonprofit public schools, the Legislature last year approved Assembly Bill 787, authored by Assemblyman Roger Hernández, D-West Covina, that would have banned the practice.
But Gov. Jerry Brown rejected it, writing in his veto message: "I don't believe the case has been made to eliminate for-profit charter schools in California."
Database producer Daniel J. Willis contributed to this report. Contact Jessica Calefati at
jcalefati@bayareanewsgroup.com or 916-441-2101. Follow her at
Twitter.com/calefati.
