Thursday, September 13, 2007

The Business Model

September 13, 2007

How to 'make a killing' in charter schools

"Trying to make a killing in the charter school business"?! Yeah, that's right, the charter school business is so profitable that I'm telling all my friends in the hedge fund business that they're in the wrong business. My message: "If you really want to make a lot of money, start a charter school!" LOL! - Whitney Tilson

LOL, indeed.

Edweek reports that C. Steven Cox, the founder of the now-defunct California Charter Academy, was indicted Sept. 4 on 56 counts of misappropriation of public funds and 56 counts of grand theft. Mr. Cox was also accused of failing to file a state tax return.

But while Cox was caught, a closer look at the way CCA operated may shed some light on how many for-profit EMOs use vertical integration (see below) to “make a killing” in the charter school business (despite denials by DFER's charter investor types like Whitney Tilson).

CCA was formerly the largest charter school operator in California, with multiple campuses scattered throughout the state. Cox founded Educational Administrative Services Corporation (EASC) in March of 2000. This for-profit company was to manage the day-to-day operations of the charter schools.

But while EASC was providing contracted administrative services to CCA, the company also began to diversify. EASC formed the following subsidiaries while continuing to manage the CCA charters: Everything for schools .com (EFS), Maniaque Management Group, Xtreme Motor Sports, and Hautlab Music Group. Auditors suggest that remuneration received by EASC from the charter schools for administrative services was somehow inappropriately funneled to fund these business ventures.


From Klonsky's business guide to for-profit charter school operators:

Full vertical integration occurs when a firm incorporates the value-chain of a supplier and/or that of a distribution channel into its own value chain. This generally happens either by a firm’s acquiring a supplier and/or a distributor or by a firm’s expanding its operations. Expanding operations means to perform activities traditionally undertaken by suppliers or distributors.


In December of 2001, the CCA charters formed the American Public Agency Authority, a joint powers authority under Cox’s guidance. The agency was to "pool" resources of the charters to develop a self-insurance plan. The APAA offered a liability package, workers' compensation, and health care. Ironically similar to companies affiliated to CCA, board members consisted of individuals involved in CCA charter schools. In addition to the CCA charters, 12 other charter schools applied for either workers compensation or liability insurance.

The CCA audit found that APAA charged highly inflated rates for their insurance coverage. Adding to the sum of money APAA made through charging excessive rates, it was also alleged that APAA financed the same insurance policies twice. This supposedly contributed to a surplus of cash which APAA did not require to pay their $517,000 premiums to insurance carriers. Similar to earlier payments received by EASC, EASC again transferred funds paid by the CCA charters for services rendered to APAA bank accounts.

Got it, Mr. Tilson? But then, who am I to tell you?