K12 Online Learning is in Washington State  using tax dollars to cash in on the online charter school industry.

This was first published on the Seattle Education blog in 2012 and originally posted at Ed Week the same year but I think it’s time to bring attention back to this cash cow brought to you by ALEC.

K12 Online Learning is in Washington State and using millions of tax dollars to advertise their enterprise. K12 also has a full time lobbyist haunting the halls in Olympia.

Virtual ed. company faces critical press and a recent lawsuit

Ronald J. Packard, center, the chief executive of K12 Inc., and his son Chase celebrate the company’s listing on the New York Stock Exchange in 2007, along with John F. Baule, the chief operating officer of K12. Don’t they look happy.

In a scant few months, K12 Inc. and its fluctuating performance on Wall Street are proving that the combination of being a publicly traded company and operating in the school marketplace can lead to heightened levels of scrutiny in a growing but controversial sector of education.

On Dec. 12, the common stock price for the company, the nation’s largest for-profit operator of online K-12 schools, sat healthily at $28.79 per share, a dip from highs of $39.37 earlier in the year but a $10 increase from two years before.

The following day, The New York Times published a front-page article casting K12 Inc. as the center of a broken for-profit online school movement. K12, the newspaper said, yielded big profits despite data suggesting its students were performing well below average.

K12 Inc. has been able “to use education as a source of government-financed business, much as military contractors have capitalized on Pentagon spending,” the article said.

Three days later, K12 Inc. stock, which is traded on the New York Stock Exchange, had plummeted 34 percent, to $18.90 a share.

K12 at a Glance

Founded: 2000

Public Offering: 2007

New York Stock Exchange Symbol: LRN

Founders: Ronald J. Packard (formerly of Knowledge Schools, McKinsey & Co., Goldman Sachs), William J. Bennett (former U.S. Secretary of Education; no longer with the company)

FY 2011 Revenue: $522 million

FY 2011 Net Income: $12.8 million

Outstanding Shares: 36,381,336 (as of Dec. 31, 2011)

Current public school enrollment: 105,070

States with operations: 29, plus the District of Columbia

Employees: 2,500 (as of June 30, 2011)

SOURCE: Education Week

Some education experts excoriated the company, for-profit education, and online schools. Others have picked apart the criticism as one-sided and unempirical. Either way, the company occupies a complex space in education. K12 and other education providers can find it especially tricky to operate as public companies. (“Publicly Traded Ed.Companies Are Rare,” this issue.)

The Business Model

K12 Inc.’s contracts with school districts are paid for with public dollars. It must answer to taxpayers and navigate the increased focus on accountability and performance data in public schools. But as a publicly traded company, it also must answer to shareholders and the U.S. Securities and Exchange Commission.

Just over a month after the New York Times article was published, a K12 Inc. shareholder filed a federal lawsuit against the company. The suit claims its executives, specifically Chief Executive Officer Ronald J. Packard and Chief Financial Officer Harry T. Hawks, pumped up stock prices by misleading investors with false student-performance claims.

Company officials say the criticisms are exaggerated.

“I’m a big believer in transparency and accountability. I do think the more visible you are, the easier it is to try and attack you,” Mr. Packard said in an interview last week. “For reasons I don’t fully understand, there are a lot of people who don’t like for-profit companies in education.”

K12 Inc. is expected to generate around $680 million in revenue this year, from a variety of sources. It sells K-12, college-preparatory, and foreign-language curricula to school districts, individual schools, and home-schoolers; operates online and blended-learning private schools domestically and abroad; and sells education software and learning-management systems to schools.

Recently, the company has bought all or part of companies that provide similar products, including online schools operator Kaplan Virtual Education, education software maker American Education Corp., and Web International Education Group, a China-based provider of English-language courses.

But its management of public online charter schools is by far its most-scrutinized line of business. K12 Inc. is the rare company where the performance of its end-users—students—can have an impact on the bottom line. A significant portion of the income for online school operators is tied to enrollment, and if student-performance numbers are down, parents may be less likely to enroll their children and the virtual schools could risk being shut down.

Legal Claims

According to the lawsuit filed against K12 Inc., the Herndon, Va.-based company misled shareholders and inflated stock prices by not disclosing data showing that K12 Inc. students perform below state averages and by not being truthful about student-to-teacher ratios and student-recruitment practices.

“I’m more convinced than ever that there are valid claims against the company, but also the business model has questions that need to be answered,” said Richard Gonnello, a lawyer with the New York City-based firm Faruqi & Faruqi LLP. Mr. Gonnello represents David Hoppaugh, a K12 Inc. shareholder from Cado Parish, La., who filed the suit in U.S. District Court in Alexandria, Va. After a 60-day window for other shareholders to join the suit as part of a class action, a lead plaintiff and trial court will be determined.

The suit says that “additional facts supporting the allegations” will be submitted after that window.

“K12 disputes the claims and will vigorously defend itself,” company spokesman Jeff Kwitowski said about the lawsuit. He and Mr. Packard declined to comment further on the suit because it is ongoing.

Most of the allegations in court documents center around the New York Times article, but specific instances in which Mr. Packard allegedly misled investors about test scores stand out.

In separate instances in February and March of 2011, Mr. Packard told investment analysts that K12 Inc. students’ performance exceeded state averages in terms of proficiency and test scores.

In a presentation given to investors at that time, a bar chart, titled “Academic Performance Relative to State Average Across Six States,” shows a purple bar with +18 next to it and “Math” beneath it, and a green bar with +20 and “Reading.” No source is listed for the data.

Mr. Kwitowski said he could not comment further on the data because that information is related to the lawsuit.

The suit also says that in October 2011, on a conference call with investors, Mr. Packard said the Agora Cyber Charter School in Pennsylvania (mislabeled in the suit as “Aurora Virtual Charter School”) produced test scores “higher than the typical school on state-administered tests for growth.”

The New York Times article that caused stock prices to drop precipitously cited data that Agora students performed well below the average for Pennsylvania students in reading and math. Agora enrolls more than 8,000 students and, in fiscal 2011, accounted for 13 percent of K12 Inc.’s overall revenue.

“Plaintiff would not otherwise have purchased or acquired K12 stock had plaintiff known the truth,” the suit says.

Following each of the February, March, and October 2011 instances cited in the suit, K12 Inc.’s stock prices improved negligibly.

In a Dec. 13 response to the Times article, the company said the student-performance measurement used for Agora—adequate yearly progress, or AYP, mandated under the No Child Left Behind Act—was “broken” and not representative of online schools that enroll large numbers of students across states.

In an interview with Education Week, Mr. Packard admitted that test scores had slipped. But he also pointed to data showing that arriving K12 Inc. students, typically from relatively low socioeconomic backgrounds, perform better on proficiency exams the longer they enroll in its schools.

A common criticism of online schools, however, including those run by K12 Inc., is high student-turnover rates.

In individual states, the company points to the K-12-operated Florida Virtual Academy’s rating of A on its state accountability report between 2006 and 2009. (That school is not to be confused with the Florida Virtual School, the largest state-sponsored virtual school.)

K12 also cites the above-state-average proficiency levels of most grade levels at the company-run Ohio Virtual Academy last year, though the school did not make AYP.

And University of Arkansas researchers found that a cohort of about 180 students at the K12-operated Arkansas Virtual Academy achieved larger performance gains on Arkansas Benchmark exams between 2008 and 2011 than a similar group of students in traditional schools.

But in Agora’s case, the school performed poorly on the Pennsylvania Value-Added Assessment System for 2011. The school’s average growth index, which measures performance on state tests, is minus 12.1, among the lowest in the state.

More Contracts Signed

K12 Inc. has signed 200 local contracts nationwide since December, Mr. Packard said during a conference call with analysts Feb. 7, following the release of the company’s quarterly financial report. The company reported a 29.1 percent increase in revenue from the same quarter the previous year and an increase in enrollment from 98,300 students to 143,900, but a 50 percent decrease in operating income, attributed to increased costs.

In addition to the article by The New York Times, recent reports by The Arizona Republic, the Detroit Free Press, the Tampa Bay Times, and CNN have questioned the effectiveness of virtual schools.

“Do we see questions about it? Yes,” Mr. Packard said on the conference call, referring to the bad publicity. “Is it affecting us? I think it’s too early to tell.”

Mr. Packard was asked if the company would do more to seek out independent data to counteract poor performance numbers for online schools that have been reported recently.

“We’re planning to work more with outside researchers than we’d done previously,” Mr. Packard said.

On the Feb. 7 call, analysts also focused on an $8 million reduction in fiscal 2012 expected revenue (down to $680 million in revenue), related to potential budget cutbacks and policy changes on the state level.

Mr. Packard would not disclose details on the measures, including in what states they may occur. He did say the measures were not related specifically to K12 Inc.

Trend Eyed Warily

Overall, states are cautiously embracing online schools, including those with for-profit management. Florida, Idaho, Indiana, Iowa, Oregon, and Tennessee recently passed measures making virtual schools more easily established, helping to spur K12 Inc.’s enrollment growth. Mississippi is considering a virtual charter school bill.

But other states are beginning to grapple with some of the ethical considerations that come with for-profit and virtual schooling.

In Pennsylvania, superintendents are asking the state legislature to examine the per-student costs being paid to cyber schools run by management organizations versus the costs of cyber schools run by districts.

Thomas Seidenberger, the superintendent of the 8,000-student East Penn school district, in Lehigh County, said his district pays $8,800 for each student who attends a cyber school, including Agora, despite “dismal” test scores. Twenty-six East Penn students attend Agora, he said.

Along with neighboring districts, East Penn offers its own cyber school with an in-house curriculum and technology services contracted to a Pittsburgh company. Thirty East Penn students are enrolled at the school at $4,400 per student, Mr. Seidenberger said.

“I’m not opposed to choice, but we think we’ve designed a model that’s fair to parents and students and fair to taxpayers,” he said.

In response to Mr. Seidenberger’s information on costs, Mr. Packard said: “My guess is they aren’t counting all of their costs.”

In Franklin County, Ohio, Judge John F. Bender made a potentially precedent-setting ruling on Feb. 6 that White Hat Management, a for-profit, privately held operator of online schools throughout Ohio, must disclose financial records with information on how it manages its schools. Ninety-six percent of White Hat’s payments derive from public funds, the ruling says.

Many of the schools that are plaintiffs in the lawsuit against White Hat have struggled academically, and a few of them have closed, said James D. Colner, a lawyer representing the Ohio schools.

Charles R. Saxbe, a lawyer representing White Hat, said the company plans to appeal the judge’s order, which he described as using “tortured reasoning.”

Judge Bender’s ruling that “the White Hat defendants are public officials” is a “groundbreaking decision” that could serve as a model in other states, Mr. Colner said. K12 Inc. must disclose its financial documents because it is a public company, but the Ohio order may have broader ramifications.

In Michigan, a bill that would remove a cap on online schools and enrollment has narrowly passed at the committee level in the legislature, but could stall before a full vote, according to local reports.

And an excerpt from PR Watch:

K12 Inc., the nation’s largest provider of online charter schools, where low-paid teachers manage as many as 250 students at a time and communicate with their pupils only through email and phone. The corporation, whose CEO Ron Packard received $5 million in total compensation in 2011 (and owns around $24 million in shares), is on the ALEC Education Task Force and its lobbyist Lisa Gillis has Chaired ALEC’s Special Needs Subcommittee. According to a report in the New York Times, students in K12, Inc. schools often perform very poorly, and some K12 teachers claim that they have been encouraged to pass failing students so that the company can receive more reimbursement from states. K12 receives an average of between $5,500 and $6,000 for every student on its rosters — the same amount that would be spent for students attending a brick-and-mortar school, despite K12 not having to pay for cafeteria, gyms, busing, or heat and air conditioning — and much of K12’s profits are spent on advertising targeted at increasing enrollment, rather than on investments in education. At K12’s Agora Cyber Charter School, which produces more than 10% of the company’s revenue, nearly 60% of students are behind grade level in math, nearly 50% are behind in reading, and a third do not graduate on time.

For more on ALEC, see Bill Moyers special United States of ALEC: