K12 Inc.: The Skirmish In Seminole County And The Desperate Race

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Note from author: Over the past week, the NCAA notified K12 Inc. (NYSE:LRN) that it will no longer accept credits earned from Aventa Learning, a K12 unit whose Internet coursework has been favored by college student-athletes or those prepping for professional debuts, because of concerns over rigor and standards. Language and documents discussing this have been inserted near the bottom of the article.

The new school year appears to be starting off with plenty of headaches for leading online educator K12.

Like a seventh-grader caught flipping to the answers in the back of the book, a Florida county nailed the one-time Wall Street darling for apparently misleading regulators and parents about who was teaching its students.

From the moment it secured its contract to run Seminole County's Virtual Instruction Program in early 2009, K12 represented to Florida Department of Education officials that courses offered in a fast-growing virtual school were taught by certified teachers.

In many cases they were not.

Nor, according to documents obtained by The Financial Investigator via the Freedom of Information Act, was this a one off administrative or judgement error.

A report Seminole County submitted to the Florida Department of Education's Inspector General's office seeking their involvement in the matter lays out the scheme clearly enough.

The trouble began for K12 in January with what appears to have been a series of tips from former company teachers upset over the matter.

The tips pointed investigators to a series of emails and phone calls in August and September 2009 between Patty Betoni, the then-Director of Virtual Instruction Programs at Florida Virtual Academies (the K12 unit running Florida's county-level virtual instruction programs; she now holds the title of Head of School) and Diane Lewis, Seminole County's Director of Instructional Technology.

At the time, K12's Betoni and her staff were scrambling to come up with Florida-certified teachers to staff Seminole County's growing online student population and in a pinch, Betoni had apparently inquired to see if they could fill in the gap using non-certified teachers. The answer was "no."

Florida's law on this, as Seminole County laid out to K12 (and in the FOIA documents) is unambiguous: The teachers had to be state-certified. Florida, which has staked out a claim nationally in publicly embracing virtual and charter schools as a cornerstone of its education policy, expressly promises parents that teachers in schools paid for with public funds will be certified.

Why K12 simply ignored Seminole County's demand is not known. Regardless, per the internal emails, K12 continued to use what is known in education circles as a "teacher of class" and a "teacher of record" framework. It's a simple concept: State-certified teachers sign the FTE, or full-time enrollment forms, showing the state that a student was enrolled full-time-thus satisfying Florida law during the school year but the class instruction and grades were handled by a "teacher of class" who didn't have to be certified in the subject matter. (Though state certification naturally does not guarantee expertise in the subject matter, it does ensure working familiarity with it and at least some experience teaching it.)

To education bureaucrats the distinction is a formal but necessary one; to K12 it is vitally important. Hiring certified teachers to instruct every class is an expensive proposition, and thus stood to hurt the Seminole County contract's margins. Conversations with administrators of public and virtual schools reveal that the economics of staffing a faculty with only certified teachers makes a virtual school's employee cost structure similar to a standard public school's. In Seminole County's case, a more likely scenario is that teachers with certification in one subject - science, for example - wound up instructing students in other courses too, such as math.

The fine points of education law aside, the economics of full compliance almost certainly makes these contracts lower-margin for K12. The company's business model was built on offering flexibility in education and its corporate income statement is likely most attractive to Wall Street with the same flexibility. Seminole County pays K12 $3,995 a student per year for virtual schooling, so an extra $5,000-$10,000 annual salary expense in each of the 42 school districts in Florida where K12 operates virtual schools.

Still, from Seminole County's point of view, after the position on certification had been driven home to K12, the matter was seemingly resolved.

Within K12, however, it was business as usual. According to emails obtained by Seminole County, in February of 2011 when it came time to certify enrollment via the FTE form, K12 project manager Samantha Gilormini sent a teacher named Amy Capelle an email acknowledging that fudging the books had become policy.

Per the email on page nine of the PDF, Gilormini advised Capelle that she would see "a few extra students on (her) class roll." In her case, 105 of the 112 students on a class list were not hers. Capelle immediately protested that this was unethical and, a few weeks later, formally refused to sign the class list.

Regardless, Gila Tuchman, a K12 administrator who hadn't taught those courses, signed off on the list "for" Capelle.

Seminole County did an internal audit of its February 2011 class rolls to get to the bottom of the "teacher of class/teacher of record" issue. One analysis they did that interviewed parents showed that 61 of the 88 students attending the school reported that they were listed as having at least one teacher who did not instruct them.

(K12 sought, but was denied, permission to run a charter school in Seminole County last year; it is expected to receive a charter this year.)

Jeff Kwitowski, a spokesman for K12, was emailed a copy of the Seminole County investigation and asked for comment. His reply, via E-mail, took exception to Seminole County's assertions.

"K12 has been working closely with the Florida Department of Education and Inspector General's office on the issues discussed in the documents. K12 does not believe that allegations of any kind of violation are accurate. Because K12 is continuing to work with state officials on these issues, further comment would be inappropriate until that work is complete."

Both Tuchman and Gilmorini remain with K12 in administrative capacities. Capelle is no longer with K12 and did not return a message left on her cell phone.

The back-and-forth with Seminole County is not the only bad news K12 has attracted as the school year begins.

The Georgia Department of Education cited the special education program of the K12 administered Georgia Cyber Academy for a host of violations in June. A letter discussing these issues issued last month is here. The letter leaves little doubt that the Department of Education means business: If GCA does not fix a host of problems by the end of October, steps to revoke the school's charter will begin.

The issues read like a laundry list of evergreen complaints made against K12-run schools: High caseloads, high staff-to-student ratios, FTE reporting and questions over compliance with spending IDEA funds.

In K12's defense, the letter notes that progress has been made in improving several areas. Asked for comment about Georgia, K12's spokesman said matters are in hand.

"Georgia Cyber Academy (GCA) has been working with a consultant, recommended to GCA by the Georgia Department of Education (DOE), for the last several months on these issues. That consultant recently filed a report to the DOE indicating that the school has taken action to address each issue identified by the DOE. The consultant considers the school to be in substantial compliance and is awaiting final review and acknowledgement by the DOE."

Still, as with Florida, both the problem and solution are rooted in money. Running an effective cyber education program for special needs children inarguably requires a tremendous amount of teacher time and interaction. In turn, this requires more teachers - specifically, experienced teachers - which, definitionally, is more expensive for the school.

K12′s message to parents and legislators has always been uniquely powerful: You and your child should have a choice in education. It resonated so thoroughly that K12′s backers, its longtime chief executive Ron Packard and, until recently, its shareholders, were handsomely paid for their faith in an education beyond a classroom's walls.

But the educational benefits of the K12 choice don't appear to have paid off, handsomely or otherwise, quite as neatly for the students. Rarely does a week go by without more headlines centering on concerns over the effectiveness of K12′s schools or programs. Specifically, the NCAA's refusal to accept credits from Aventa Learning due to concerns over the rigor and standards of the courses is a potentially devastating blow for one of the company's most high-profile business lines. (Click here to read a letter from a K12 executive discussing the issue; here is an internal K12 E-mail seeking information to comply with the NCAA's investigation.)

The money that it takes to remedy the seemingly structural flaws in K12′s business model will ultimately come out of its bottom line. Until then, K12 remains stuck in a desperate race, effectively a reprise of the sub-prime mortgage origination business circa 2004: Enroll more students than drop out because financially stressed state governments likely cannot increase reimbursement levels.

All races, of course, end. There came a point when sub-prime mortgage investors decided they weren't being paid enough for the true credit risk they were assuming and there will come a time when parents and school boards will decide whether the true cost of educational choice is being fairly allocated.

Disclosure: I do not have any sort of investments in the securities of any company I write about, nor for that matter, in anything at all (save for my house).