Education

Experts warn against ban on for-profit management

October 28, 2020

Ray Carter

In its audit of Epic Charter Schools, the office of the Oklahoma State Auditor & Inspector urged lawmakers to follow the lead of California Democrats—and embrace a key plank of the Democratic Party’s national platform—by banning for-profit entities from managing Oklahoma charter schools.

The argument for making that change, in essence, is that the profit motive incentivizes operators to shift money away from educational services for children to boost ownership’s bank accounts, and that nonprofit entities don’t face the same pressures.

Experts say that view is not based in reality.

“There is a fundamental misunderstanding that people have of nonprofit organizations, and that is that they don’t make any profits,” said Vance H. Fried, director of the Institute for the Study of Free Enterprise at Oklahoma State University. “It’s not that they don’t make profits. It’s that no one owns the profits. There is no owner of the profits.”

The financial statements of for-profit entities include an item on the balance sheet labeled “owner’s equity.” Fried noted nonprofits have the “very same thing except it’s just called ‘net assets.’”

“The motivation is not that I can get paid a dividend or some return on a financial investment,” Fried said. “But you still make profits if you’re successful. And often the nonprofit may charge more than the for-profit for the same service.”

He noted the Surgery Center of Oklahoma is a for-profit entity yet typically charges far less than its nonprofit competitors for the same medical procedures.

Debate over whether nonprofit entities are preferable to for-profit organizations has arisen because of policy recommendations included in the state audit of Epic Charter Schools, an online provider of K-12 education whose founders also run the privately owned management company that operates the school.

“The State of California recently addressed this issue by passing legislation requiring that no charter be granted or renewed for any charter school operated by any type of for-profit organization,” the audit states. “The legislation further prohibits a charter school from entering ‘into a subcontract to avoid the requirements of this paragraph.’ Our legislature has also recently taken steps to increase public charter school oversight and accountability, but consideration of this concept for the State of Oklahoma is warranted.”

The audit adds, “Other states have already determined for-profit charter management organizations do not benefit taxpayers; Oklahoma should consider the same.”

Opposition to for-profit management of charter schools has become a prominent goal of the national Democratic Party, whose 2020 platform states, “Democrats believe that education is a public good and should not be saddled with a private profit motive, which is why we will ban for-profit private charter businesses from receiving federal funding.”

But just because nonprofits don’t distribute profits to shareholders does not mean officials involved with those organizations have no financial incentive to boost profits, Fried notes.

“There’s often excessive compensation in nonprofits,” Fried said. “What else are you going to do with the money? Pay some of your employees better than you need to. You often see positions you really don’t need, but what else are you going to do with the money? And you see a lot of what’s called ‘other mission subsidy,’ and that’s (where) we’re going to make money here in one area and we’re going to use that to subsidize another activity.”

One nonprofit entity involved in public charter schools—traditional school districts that can serve as charter school sponsors—has been accused of de facto price gouging for vague and undefined “administrative” services to boost the revenue of the sponsoring district in ways that reduce classroom funding for children in the charter school.

In 2019, Families for Education, which operates Independence Charter Middle School and Harding Charter Preparatory High School, filed a lawsuit challenging increased management fees being charged by the sponsoring Oklahoma City school district to charter schools.

That lawsuit noted Oklahoma City district officials claimed the prior 3-percent fee did not cover the costs the district incurs related to charter-school supervision, but when charter school officials requested an itemization of services provided by the Oklahoma City district, the charters were informed “that an itemization would not be provided.”

At the same time, Oklahoma City school officials publicly indicated the fee increase was being imposed because the district was trying to make up for revenue lost as fewer students attended the traditional school district, and not because of increased administrative costs associated with charter schools.

According to the lawsuit, officials linked the fee increase to the Oklahoma City district’s loss of students in statements made at Feb. 5 and Oct. 7 meetings. Oklahoma City Superintendent Sean McDaniel also explicitly linked the fee increase to the district’s loss of students to charter schools in an April 23 letter, saying the fee “compensates the district for the cost of reduced student enrollment.”

“Public schools these days, when they have the chance to make a buck, they certainly will,” said Jonathan Butcher, senior policy analyst at the Center for Education Policy at the Heritage Foundation.

He noted that one district in Virginia gained nationwide attention when it opened in-person daycare for children, charging a fee to parents who had to resort to daycare because public schools were not providing in-person instruction due to COVID-19.

“They’re using their schools for for-profit daycare settings while they’re not offering in-person instruction,” Butcher said.

Even as the state auditor suggested that for-profit entities should not manage schools, private for-profit entities are involved in almost every other facet of public education in Oklahoma.

In 2019, the latest year for which data are available, more than $1.7 billion of Oklahoma public-school money was spent on supplies and services with the majority of that spending going to for-profit businesses such construction-and-maintenance and repair companies, accounting firms, laundry services, janitorial services, book publishers, and more.

In her initial response to the Epic audit, State Superintendent of Public Instruction Joy Hofmeister conceded that it is “common practice” for “a public school to utilize the services of a private vendor.”

Earlier this year, Hofmeister even personally touted a private-sector product—the Rave Panic Button—which she declared to be “an important component of ensuring our students are learning in a safe environment.”

Rather than focus on the for-profit or nonprofit tax status of providers, experts say Oklahoma policymakers should instead focus on a more basic question: Are providers delivering results?

“If I’m buying education services, which is basically what you’re doing when you're funding K-12, it shouldn’t matter whether it’s a profit or nonprofit,” Fried said. “All you care about as a customer—and the state’s a customer—is did you pay them the contracted amount and did they deliver the services you wanted?”

“What it should come back to, both as advocates as well as parents and lawmakers, is are they succeeding? Are kids being successful? And if kids are not being successful, are the schools getting shut down the way they should be? I mean, that’s one of the draws of charters, right, is that if the school fails you shut it down,” Butcher said. “And if those two things are happening—if kids are being successful and if they are not the schools are getting closed—why then the system is working as it should. I don’t think the issue of whether they are making a profit or not really needs to factor into the equation.”