Chancellor Beacon Academies, Inc.

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Chancellor Beacon Academies, Inc.

3520 Mary Street, Suite 202
Coconut Grove, Florida 33133
U.S.A.
Telephone: (305) 648-5950
Toll Free: (800) 239-7510
Fax: (305) 648-5951
Web site: http://www.chancellorbeacon.com

Private Company
Employees: not available
Incorporated: 2000
Sales: $100 million (2001 est.)
NAIC: 611110 Elementary and Secondary Schools

Formed when Chancellor Academies and Beacon Education Management LLC merged in 2001, Chancellor Beacon Academies, Inc., is the second largest education management company in the United States. Through its 80 public charter schools and tuition-based private schools in eight states and Washington, D.C., Chancellor Beacon Academies serves more than 19,000 students from pre-kindergarten to twelfth grade. Like other players in the emerging education management industry, Chancellor Beacon has yet to turn a profit, though its hopes for the future remain undiminished.

Education Reform in the late 1980s

Chancellor Beacon Academies owes its existence to educational reform movements that began in the late 1980s. At that time, parents, students, teachers, and politicians were seized by the fear that the traditional public education system in the United States was failing. Standardized test scores were plummeting for students of all ages, and the ranking of American students compared to those of other nationalities was dropping. U.S. companies complained in newspaper editorials that job applicants emerging from the public school system were unable to read, write, or do basic arithmetic. Parents started to doubt whether American public schools were actually educating their children.

Demographic trends and budget problems fueled these concerns. Enrollment in public schools grew unexpectedly during the late 1980s and into the 1990s, driven in large part by the combination of higher than predicted birthrates and increased immigration. Class sizes seemed to expand every year, and the economic recession that hit the United States in the early 1990s made it difficult for schools to secure the funding needed to alleviate the crunch. Some schools, particularly those in lower-income urban areas, literally began to crumble before parents’ eyes.

To compound matters, public schools came to be perceived as places of unchecked violence. Accounts of weapons, gangs, and drugs in public schools were all too common, and teachers and administrators seemed unable to stem the rising tide of dysfunction. In their quest to find solutions to the problems in their children’s schools, parents often ran up against a tangled education bureaucracy that seemed to stymie innovation and change. Teachers’ unions, some parents felt, protected incompetent teachers and rewarded educators for their seniority rather than their pedagogical skills.

From this stew of dissatisfaction emerged the idea for charter schools. Charter schools are publicly funded and regulated schools that exist outside the bureaucratic control of public school districts. While charter schools have to follow district safety and anti-discrimination codes, they are free to experiment with curricula, class sizes, dress codes, and other policies and programs that regular public schools cannot. The schools derive their name from the charter, or contract, made with a school district or state agency, which authorizes individuals or groups to launch a school. For parents, charter schools represented a chance to wrest control from often unresponsive and distant school bureaucracies and to implement approaches that made sense for a local neighborhood. As one parent advocate told the Orlando Sentinel, “We have to go back to neighborhoods being in control of their schools.”

In 1990, Minnesota became the first state to enact legislation allowing charter schools. The first charter school opened its doors there in 1991, and the movement quickly flourished. By 1994, there were more than 100 charter schools across the United States, and the number of states accepting charter schools grew each year, encompassing states as diverse as Pennsylvania, Massachusetts, and North Carolina.

A Business Niche Is Discovered: Early 1990s

Astute observers of the changes that the charter school movement were effecting in the field of public education recognized that a potential for profit existed in school reform. While parents, teachers, and community groups might be excited and eager to launch charter schools, they had little or no experience in actually running a school. Therefore, they would need help raising funds for the actual building of new charter schools. They would need assistance hiring teachers and staff, creating curricula, managing expenses, buying textbooks, and providing school lunches. Companies that could provide these services economically and efficiently stood to reap significant gains.

Bill DeLoache and John Eason were among those excited by this prospect. Although the duo had little background in education, they recognized that the charter school movement could offer private companies access to a tremendous wellspring of public funds—the education market was estimated to be worth roughly $300 billion at this time. Although some public schools had turned to private companies on a small scale in the past, such as contracting out for janitor services, the charter school movement offered private companies an unprecedented opportunity to get into the nuts and bolts of running a public school.

With just an inkling of the changes that were to come, DeLoache and Eason founded Alternative Public Schools, Inc. (APS) in Nashville, Tennessee, in 1991, using a $2.5 million investment from a California banker as start-up capital. These self-proclaimed “citizens with a hobby” were investment counselors—not teachers or administrators. “We came at it from a business person’s perspective,” DeLoache told The Nation. “Charter laws started passing. The market was opening up.” The company proposed to manage a charter school in exchange for a flat fee, which the charter school would pay out of the per-student allotment it obtained from either the state agency or local school board responsible for school funding.

APS made its first bid to run a charter school in Tennessee in 1992, but it was not until 1995 that the company actually won a contract. That year, APS inked a five-year deal with the Wilkinsburg, Pennsylvania, school board to run Turner Elementary School, an existing public school that was in the process of changing its status to a charter school. APS took total control of the school, even to the point of ousting the unionized teaching force and replacing them with its own teachers. The company received a good deal of publicity—both favorable and unfavorable—because Turner was the first public school in the nation to be operated by a for-profit company with its own teaching staff.

Alternative Public Schools Grows: Mid- to Late 1990s

Once it entered the education management sector with its contract at Turner, APS grew rapidly, buoyed by the growth of the charter school movement as a whole. (By January of 1996, 19 states had passed charter school legislation.) As The Nation noted, in three years APS “went from being a couple of guys looking for a school to a major force in the for-profit education industry.” By early 1997, APS was managing three charter schools in Massachusetts, North Carolina, and Pennsylvania and had six other contracts in the works. The company touted its longer school year (212 days rather than the 180 day standard public school calendar), extensive day programs, and integrated curriculum.

A driving force in the growth of APS was Michael B. Ronan, who joined the company in December of 1996 as vice-president of school administration. Ronan lent the young company credibility. As the superintendent of the Uxbridge, Massachusetts, school district for 15 years, Ronan had the educational pedigree that DeLoache and Eason lacked. Even more significantly, Ronan had earned his reputation by “turning the Uxbridge school district into a national model for cost-efficient education,” according to the Worcester Telegram & Gazette. Ronan quickly became the chief operating officer at APS.

With Ronan’s guidance, APS slightly shifted its strategy for attracting new school clients. Rather than wait for a charter school to be established—and then go to the governing board to pitch APS’s expertise—APS began directly to lobby parent groups to form charter schools (either by establishing a new school or by converting an existing public school to charter status). In 1997, for example, APS shepherded a parents group through the process of converting the Washington, D.C., Richardson Elementary School to a charter school. The company “help[ed] parents get organized,” said the Washington Times. “In return, it proposes to manage school finances for a fee if the charter is approved.”

As APS continued to add to its roster of schools, the company hit an obstacle involving its first client, Turner Elementary. In August of 1997, a judge declared that the privatization of the school (and the subsequent firing of its union staff) was illegal, and decreed that the 1997-98 school year would be the last in which the school was run by APS. Around the same time, an independent evaluating agency concluded that Turner’s privatization had had a negative impact on students. According to the Pittsburgh Post-Gazette, the study found that students had declined academically on APS’s watch.

Company Perspectives:

At Chancellor Beacon Academies, we believe parents should decide where their children attend school and play an active role in their education. Most of all, we believe that parents should make the best decision for their child. Finally, you can choose a school that will give your child the personal attention every child needs. At Chancellor Beacon, all teachers are nationally recruited and share our vision of nurturing the whole child. And their performance, as well as that of the students, is continuously evaluated to ensure that each child achieves his or her personal best. Chancellor Schools offer: smaller classes for more personal attention; more teacher involvement to create a friendly, secure environment; computers and advanced technological support in every classroom; and a proprietary, comprehensive curriculum that integrates best teaching practices.

APS took these developments in stride and, in 1997, moved its headquarters from Tennessee to Westboro, Massachusetts, and changed its name to Beacon Education Management LLC (BEM) to reflect the firm’s “expanded mission.” And expand the company they did. By the close of 1999, BEM operated 25 charter schools in five states, and served more than 4,500 students. BEM’s growth reflected the fortunes of the school management sector as a whole. The number of charter schools grew astronomically through the late 1990s, and many of these schools then turned to for-profit companies for help. Reflecting the flourishing state of the industry, BEM’s largest competitor, Edison Schools, made a heavily promoted and well-received initial public offering (IPO) of stock in 1999.

Problems with Profitability

Despite the industry’s rapid growth, there was a nagging concern about the education management sector: profitability. Through the turn of the millennium, no education management company—including Beacon—had turned a profit. In 2000, BEM had $27 million in revenue but reported a $6 million loss. The company remained optimistic, though. “We can break even with just 30 schools,” Michael Ronan told Business Week, a goal the company expected to achieve within two years. The reality, however, was that BEM and its counterparts were in a capital-intensive industry, which posed significant fiscal challenges. New charter schools typically required new buildings, and state funds usually did not cover building expenses. Even existing public schools that were simply converting to charter status often still needed extra cash to operate facilities and buy equipment. As a result, BEM was frequently forced to loan its clients money for infrastructure and other projects. Dow Jones News Service noted that in 2000, BEM had extended almost $6 million in loans to 13 of its schools (nearly the exact amount of the company’s net loss for the year). Dow Jones explained the logic behind this business strategy: “The schools are fledgling enterprises, in need of extra money. … [The loans] are almost necessary investments to ensure that the schools ultimately prosper and are in a position to more reliably pay the management fees Beacon relies on for its revenues.”

BEM’s solution to this conundrum was to seek additional operating capital. In 1999, venture capitalist William R. Hambrecht invested $6 million in the company; the following year, KinderCare announced an initial investment of $5.2 million. But even these infusions were insufficient to meet BEM’s needs. Consequently, in May 2001 BEM announced plans to follow in Edison’s footsteps and become a public company with an initial offering of $33 million in stock. BEM planned to use the proceeds from the sale to pay off loans and generate working capital. But the company cautioned in its pre-IPO Securities and Exchange Commission filing that “We have not yet demonstrated that public schools can be profitably managed by private companies, and we are not certain when we will become profitable.” Furthermore, the bursting of the economic bubble of the late 1990s, along with the general downturn that began in the spring of 2001, made the investing climate much less hospitable to stock offerings from companies with uncertain prospects for profitability. In August 2002, BEM put off its IPO plans, citing poor market conditions.

Chancellor Academies Is Founded in 1999

Unlike BEM, Chancellor Beacon Academies’ other progenitor, Chancellor Academies, was a relative newcomer to the industry. Backed by $35 million in venture capital supplied by Warburg Pincus, Chancellor Academies was founded in 1999 by a team of education insiders led by Octavio Visiedo, the former superintendent of Florida’s Miami-Dade school district. Chancellor’s selling point was its curriculum, which incorporated what was termed an “integrated” approach to education. “No one subject is taught in isolation,” a company spokesperson explained to the Boston Globe. “They all overlap, so that kids understand how everything in life is integrated and not exclusive.” Departing from the approach pioneered by BEM, Chancellor chose not to lengthen the school day or the school year, promising instead a “standards-based” approach to improve pupil performance. It most popular pledge with parents, though, was Chancellor’s commitment to smaller class sizes of no more than 25 students.

With sleek new buildings, which often included high-tech computer labs, Chancellor schools seemed a far cry from regular public schools. Although capital intensive, this approach proved a wonderful marketing tool for the company. “It just looks like a private school,” one parent gushed to the South Florida Sun-Sentinel about a Chancellor school. Indeed, what drew many parents to transfer their children to an untried and untested privately run public school involved this sort of nebulous perception rather than a specific attribute of the charter school itself. Visiedo’s own assessment of the value of charter schools was candid: “The school districts are saying, ‘Maybe you can do better.’ The parents feel it can’t get much worse.”

Key Dates:

1990:: Minnesota passes the first charter school legislation in the United States.
1993:: Bill DeLoache and John Eason found Alternative Public Schools.
1994:: Alternative Public Schools wins its first contract to manage a school.
1997:: Alternative Public Schools changes its name to Beacon Education Management; Michael Ronan joins the company.
1999:: Octavio Visiedo, Alan Olkes, John J-H Kim, and Kevin Hall form Chancellor Academies.
2000:: Chancellor opens its first independent school (The Day School at Coral Springs) and enters the mid-Atlantic region by purchasing Fairfax-Brewster School in Virginia.
2001:: Beacon Schools and Chancellor Academies merge to form Chancellor Beacon Academies; President Bush dedicates $375 million in his federal budget for charter schools.

The formula worked well for Chancellor, particularly in its home state. Charter schools had received an enthusiastic endorsement from Florida Governor Jeb Bush, who himself had once worked for an education management company. Governor Bush sought to increase public funding for charter schools. By October 2001, Chancellor was running 11 public schools in Florida, as well as eight public schools in Arizona and one in Washington, D.C. Chancellor also launched two purely private schools (collecting tuition directly from parents rather than via public funding) in Florida and Virginia.

The company followed a cluster growth strategy by concentrating on adding schools in pre-determined geographic areas, particularly Florida and Arizona. In rapidly growing states such as these, capital budgets were strained, fraying the public education system and making the concept of charter schools even more popular.

Chancellor and Beacon Join Forces: Early 2000s

Like BEM, Chancellor grew at a ferocious pace yet had not reported a profit. Both companies recognized that their best chances for profitability involved following the lead of several of their competitors (including the industry leader, Edison)— merging with another education management company. In January 2001, BEM and Chancellor agreed to join forces. “In this industry, we don’t pretend that our goal is to be the absolute largest,” Visiedo told Education Week. “But you do have to have a certain scale.” The new company, named Chancellor Beacon Academies, became the second-largest education management company in the country. With its combined resources, Chancellor Beacon served 19,000 student in 81 schools.

A few weeks after Chancellor Beacon was formed, the company received a great deal of attention by playing a part in the largest school privatization in U.S. history. The public schools in Philadelphia, Pennsylvania, had long been plagued by academic and financial woes, with 75 percent of Philadelphia’s students unable to meet state academic standards. Frustrated with the district’s long-standing inability to show improvements, the state took control of the school district. Led by Republican Governor Tom Ridge, the state decided to turn 70 of the district’s schools over to private companies in a move the Philadelphia Daily News called “a tremendous endorsement for the industry.” Chancellor Beacon made a bid and won a contract to manage five Philadelphia schools. Despite being beset by financial problems of its own, Edison, the nation’s largest school management company, was tapped to run the bulk of the schools.

Chancellor Beacon was optimistic about its future prospects. With charter schools in Arizona, Florida, Massachusetts, Maine, Michigan, Missouri, New York, North Carolina, Virginia, and Washington, D.C., Chancellor Beacon retained a secure grasp on its position as the second largest education management company in America. Despite 2002’s economic downturn, the company anticipated having its first break-even year in 2003. Moreover, although the young industry continued to evolve, public schools run by for-profit companies appeared to have made themselves a permanent feature of the American educational landscape. Even though no study had ever demonstrated that privately run charter schools were even slightly better than traditional public schools at improving their students’ academic performance, President Bush made funds for charter schools the centerpiece of his 2002 education budget. Industry analysts believed the charter school movement, and the private operators who had staked their fortunes on it, were just beginning to flourish. The education management industry expected to see revenues in excess of $1 billion by 2004.