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Private company could cash in on online charter school
This is an archived article that was published on sltrib.com in 2007, and information in the article may be outdated. It is provided only for personal research purposes and may not be reprinted.

Utah's first virtual charter school will mean big opportunities for students and big profit potential for a private company.

K12, a Virginia-based education company, will manage Utah Virtual Academy. In return, it will receive a larger percentage of the Utah charter school's revenue than it does for schools it operates in several neighboring states, a review of contracts by The Salt Lake Tribune shows.

While Utah will pay K12 nearly a quarter of the school's revenue for administrative and technology services, the Idaho Virtual Academy pays 20 percent for similar services. The Nevada Virtual Academy hands over 22 percent of its dollars.

Like all charter schools, Utah Virtual Academy receives state funding based on the number of students it enrolls. The state's per pupil spending has been the lowest in the nation since 1988.

Because Utah spends so little, Lori Harmon, one of new charter school's founders, believes Utah Virtual Academy is justified in giving K12 a higher percentage of its budget to match what schools pay in other states.

"I'm not discounting it's a lot of money," she said. "I just think you get what you pay for."

Charter schools often are founded by parents inexperienced in the world of education management, so many parents like Harmon are happy for all K12 can provide. For the fee it charges, K12 enrolls students, provides curriculum for the virtual school and performs accounting services, among other tasks. Up to 500 students grades kindergarten through 11 will attend beginning next fall funded by a budget of $2.5 million. Twelfth grade will be added in fall 2009.

If the school is successful, K12 stands to profit even more.

Assuming the charter school has met certain goals ranging from family satisfaction to having met specific No Child Left Behind standards and has a budget surplus, K12 can eventually receive as much as 50 percent of a school's surplus as a "performance incentive fee."

"We believe that's a fair and reasonable proposal," K12 spokesman Jeff Kwitowski said. "[It's] certainly not uncommon when you're talking about a partner coming in and assuming risks and investment costs up front."

K12 continues to grow. Serving more than 35,000 students at online public schools and other programs, the company recently filed papers with the Securities and Exchange Commission for an initial public stock offering. Those documents state that between fiscal years 2004 and 2007 revenue jumped from $71.4 million to $140.6 million. The company showed a profit of $3.9 million in 2007.

Harmon praises K12 for being willing to "forgive" debt the Utah charter school accrues. That would essentially mean the school may not initially pay the full amount of fees, Kwitowski said.

"We're willing to do that as an investment [in] the kids and the school," he said.

The 500-student cap at Utah Virtual Academy and the state's low per pupil funding both contributed to the company charging the school a higher rate, he explained. Also, every school has fixed costs K12 must cover no matter where it's located.

Julie Adamic, state charter school board chairwoman, said the higher percentage for similar services raises questions even though the board approved the charter school earlier this year.

"It raises some concerns that it¹s charging more,² she said. "I¹d like some time myself to look into the situation more.²

Earlier this year, a legislative audit found that Utah's charter schools had "reasonable" administrative costs.

But the new virtual charter school would pay combined management costs per pupil more than $450 beyond what the audit found to be the norm for charter schools.

Marlies Burns, the director of the state charter school office, said the amount was concerning and made her wonder what other companies the founders contacted.

"They're not even buying a brick-and-mortar school," said Gary Belliston, the accountant at the state charter school office. "Where's all that money going?"

Questions on how to fund virtual public schools have boiled in other states for years. Of the 19 states with laws enabling cyber charter schools, Susan Patrick, president of the North American Council for Online Learning, is not aware of any that limit how much a management company could make.

She compares the situation to for-profit companies selling textbooks and other services to public schools.

"They're not setting up laws prohibiting those companies from making a profit," Patrick said. "Why would you create an artificial boundary?"

All charter schools, whether in a brick building or in cyberspace, should be funded equally, she said, referencing a 2006 BellSouth Foundation report that found the operating costs of online and traditional schools are "about the same." That study did not factor in facility or transportation costs, but suggested that including those items would show online schools cost less per pupil.

Utah is among states that sets no parameters on how much a company can charge to run an online public charter school.

As Utah wades into the new world of virtual charter schools, many questions remain, officials say. Utah Virtual Academy's funding mirrors a typical charter school, but no one knows whether that will sufficiently meet or exceed the needs of a virtual school, said Patrick Ogden, an associate superintendent at the Utah State Office of Education.

For Harmon, who helped found Utah Virtual Academy, the school's success will mean her children can continue with online public education all the way through high school. She sees it as more comprehensive than what the state currently offers through its Electronic High School. She is an avid fan of the K12 company's system, which she already uses through the Washington School District. Several Utah school districts have offered online courses through K12.

Harmon says K12 has helped her children make far more progress than they did with her as their home school teacher.

"I cannot rave enough about it," she said.

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JULIA LYON can be contacted at jlyon@sltrib.com or 801-257-8748.

Online education in Utah

Cyber education is nothing new in Utah. About 13 years ago, the state paid Utah teachers to develop their own curriculum for the Utah Electronic High School. The idea was to align it to what students were supposed to learn and to save money over time by not paying licensing fees. Not to mention that then there were few companies that sold online content. Now the state is exploring the possibility of expanding its online program to offer K-8 courses.

The Utah Virtual Academy, a newly approved public charter school, is slated to pay $700,000 to K12 annually for its online curriculum.

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