Whitney Tilson's School Reform Blog: Expose on K12 and California Virtual Academies

Two and a half years ago, I gave an in-depth presentation and published three articles (links below) about K12, the largest charter school operator in the U.S. It’s a public, for-profit company that runs terrible online schools that harm tens of thousands of students every day, in general, bilk taxpayers.

Soon thereafter, much of what I predicted came to pass and the stock collapsed, so I covered the short position (i.e., a bet that the stock would go down) I’d established in my funds. I still follow the company, however, so I read with interest the in-depth two-part series on K12’s activities in California that ran last month in the San Jose Mercury News. It’s an outstanding piece of investigative journalism that makes it clear that the state simply needs to shut down all of the K12-affiliated schools in the state immediately.

Here’s an excerpt from the first article:

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.

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.

And here’s an excerpt from the second article:

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.

And the company’s response:

In a vigorous defense, officials behind the California Virtual Academies branded this news organization's investigation into their online charter schools "wrong and insulting" and an attack against a model of school choice.

But critics of K12 Inc., the Wall Street-traded company that runs the profitable but low-performing academies, called for greater oversight of its practices.

…In a letter sent to teachers Monday afternoon, the schools' academic administrator, April Warren, called the newspaper's investigative series "a gross mischaracterization of all of the work that you all do on a regular basis." But despite their broad condemnations, neither Warren nor other school officials alleged any specific factual inaccuracies in the series.

Lastly, here’s my presentation and here are links to the three articles I published in late 2013:

· An Analysis of K12 and Why It Is My Largest Short Position (9/22/13)

· Why I’m Not Covering My K12 Short (10/10/13)

· An Open Letter To The Board And Management Of K12 (11/4/13)

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California Virtual Academies: Is online charter school network cashing in on failure?

By Jessica Calefati, jcalefati@bayareanewsgroup.com

Posted: 04/17/2016 04:59:01 AM PDT | Updated: 9 days ago

www.mercurynews.com/education/ci_29777973/is-california-online-school-cashing-failure

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K12 Inc.: California Virtual Academies' operator exploits charter, charity laws for money, records show

Posted: 04/18/2016 04:48:09 AM PDT | Updated: 9 days ago