One year ago, a small contingent of some of Chicago’s most powerful education officials flew to Arizona for a conference of education investors, hosted by Chicago Board of Education member Deborah Quazzo’s investment firm Global Silicon Valley Advisors.

The keynote speaker: Earvin ‘Magic’ Johnson.

Fellow board member Mahalia Hines introduced the NBA-star-turned-businessman whose name is now branded across five of Chicago’s newest for-profit alternative schools, called the Magic Johnson Bridgescape Academies.

“One thing I was really great at was math, so I know my money,” Johnson told the crowd. “I know a great deal, a good deal and a bad deal.”

Johnson’s entire speech focused on making money in urban areas, returning bigger profits than expected in each case. He didn’t mention the schools for dropouts in Chicago Public Schools until asked a question by someone in the audience.

One month after Quazzo, Hines, another CPS board member Andrea Zopp, CPS chief Barbara Byrd-Bennett and Mayor Rahm Emanuel’s then-education deputy Beth Swanson attended the conference, the Chicago Board of Education approved another $6 million in startup money for for-profit alternative schools. It was the second round of a multi-year expansion. (Quazzo has also come under fire in recent months after a Chicago Sun-Times investigation found that companies she invests in have tripled the amount of money made through contracts held with CPS schools.)

A WBEZ and Catalyst Chicago investigation found most of the new for-profit alternative schools are running half-day programs where students earn credits in a matter of weeks, through mostly online coursework. Yet, students are getting regular high school diplomas, with the name of the school they left. Many students never officially dropped out and some are not at all off-track.

WBEZ and Catalyst Chicago also found that many of the for-profit companies running alternative schools stand to make millions off the deals. Other findings: 

• On average, some of the companies spend more than half of their budget on consultants, advertising, technology and fees to affiliated companies.

• Companies can maximize profit by running two or even three sessions a day, serving double the number of kids, yet only hiring the same or fewer staff as a normal school. (One of the for-profit companies, Camelot, is an exception. It operates an eight-hour school day with little online work.)

• Since the companies are privately owned, the public has no way of knowing who is making money from investing in them or whether they have any connections to district or city officials.

• In at least one case, CPS contracted with a company that was, at the time, under investigation in California.

John ‘Jack’ Donahue, a leading expert on privatization in the public sector and faculty chair of the Masters in Public Policy Program at the Harvard Kennedy School of Government, said he isn’t against companies making a profit, but he cautions against outsourcing when it’s not clear what outcome you want. He was also troubled by CPS giving students diplomas from the school they left, not the alternative school.

“The problem is, when you have people with the incentive and the ability to fool us about what’s happening,” Donahue said, noting that because Illinois does not have a high school exit exam, it’s hard to measure if the diploma is meaningful. “When you can’t specify, in clear terms, what you want…because the undertaking is complex, as education is…then it won’t work.”

Because Chicago’s graduation numbers are going up, there’s no incentive for district officials to make clear that many more diplomas are coming from alternative schools.

A money-making model

When Emanuel promised to double the number of seats in alternative schools in 2011, there were 60,000 dropouts under 21 in the city. The people running a small army of alternative schools rejoiced. They thought this meant they would have room and resources to serve the thousands of kids on their waiting lists.

No one guessed it meant the mayor would look past existing alternative schools to out-of-town, for-profit companies to help fix the dropout crisis.

Nationally, for-profit education companies see opportunity in alternative schools.

There are four companies now operating in Chicago: Camelot Education, Pathways, EdisonLearning, and Ombudsman. These four companies alone run more than 100 schools in at least 30 states. When Camelot was acquired in 2011 by the private equity firm Riverside Company, managing partner Suzy Kriscunas noted in a press release: “Alternative and special education has significant growth.”

A WBEZ and Catalyst Chicago investigation into Chicago’s new for-profit alternative schools found that CPS has paid for-profit companies more than $70 million in just two years to start up new alternative schools. Most often, the companies are able to make money by cutting spending at the school level.

CPS pays the new half-day alternative schools the same amount per child that it pays normal schools. The companies can save by hiring one teacher to teach two students each day. An analysis of budget documents shows many of the new schools spend less than half their budget on school staff. Usually, schools spend between 70 and 80 percent on staff salaries.

Budgets show the for-profit schools spend hundreds of thousands of dollars on consultants, technology, and fees to their parent companies for back-office costs. In some cases, they are purchasing materials from themselves or other parent companies, too.

Last school year, CPS paid Pathways in Illinois $5.1 million to operate two schools with about 500 students. The company then paid its affiliates $1.8 million for a variety of services and curriculum. The company is also run by the daughter of a couple who started a similar for-profit chain of alternative schools in California, called Options for Learning and Options for Youth. That company fell under an investigation by the State of California for improper spending. That same couple is on the board of directors for Pathways in Illinois, while their daughter is the executive director.

Magic Johnson Bridgescape, operated by EdisonLearning in partnership with the former NBA-star, budgets $400,000 for each school to buy educational materials. Much of that is used to buy eCourses, an EdisonLearning product. Spokesman Mike Serpe said the company also buys other online programs, such as Think Through Math, which is part of Chicago Board of Education member Quazzo’s investment portfolio.

No one from EdisonLearning or Magic Johnson Enterprises would agree to an interview.

But at a press conference in Chicago in February, Johnson said he was approached by EdisonLearning because the company wanted to draw inner-city students into its schools. “What they needed was a guy like myself to come in to more or less brand it,” he said. When asked how much he makes per school, he told WBEZ and Catalyst: “That is all you need to know.”

Budget documents obtained through multiple Freedom of Information Act requests indicate how much Johnson stands to make off the alternative schools. One proposal listed a half- million-dollar fee to “Magic Johnson Enterprises,” but the assumption was based on opening many more schools.

Jack Elsey, Chicago Public Schools’ chief of innovation and incubation, said there’s no way CPS could have delivered on Emanuel’s promise to double the number of dropouts being served without outside help.

“The point is not the bottom line,” Elsey said. “The point is having an impact on students. So the benefit of getting the student in and graduated within a month or two months, means that’s one more student who’s graduated who wouldn’t have graduated before.”

‘Who cares if they make money?’

Illinois does not allow for-profit companies to run schools. State law requires public charter schools to be non-profits incorporated in Illinois. However, districts like CPS and non-profits can contract with for-profit companies to provide services.

It’s why district officials are careful to call the new alternative schools “programs” instead of schools. The for-profit companies technically hold contracts to provide what’s called an “Alternative Learning Opportunities Program.”

Bridgescape, Camelot and Ombudsman are run by for-profit, out-of-state companies. Pathways is a non-profit certified in Illinois, although its executives own for-profit companies that do business with the non-profit.

Todd Bock runs Camelot Education, one of the for-profit companies to open alternative schools in Chicago in the last few years.

“People hear the word ‘for-profit’ and they think these companies are making hundreds of thousands of dollars on these schools and that’s really, really not the case,” he said.

The schools Bock’s company runs are an outlier. Students at Camelot’s EXCEL Academies have to go to school for almost nine hours and there is little work done on computers.

He says Chicago should hold companies like his accountable for quality.

“We have an obligation to the taxpayers to do it better and more efficiently than what’s been done in the past and if we can’t do that, then we don’t deserve to be there,” Bock said.

Gary Miron, professor of evaluation, measurement, and research at Western Michigan University, studies for-profit and not-for-profit education companies. He said education companies see alternative schools as appealing because demand is so high and the companies have an excuse for poor performance, since dropouts are less likely to score well on standardized tests.

CPS is funding the new schools as if they were charter schools, but then not having them grant their own diplomas.

“Some people say, ‘Who cares if it’s for-profit? If they can deliver a better product at a lower cost, who cares if they make a little money?’” Miron said. “And then I’d say, ‘Yeah! Why not?’ But it’s not happening. It’s just not happening. When we look at the outcomes, they’re not as good.”

CPS is trying to hold the new schools accountable for performance, though it isn’t using the same measures it applies to the rest of the high schools in Chicago. Instead, it looks at improvement in reading and math, attendance and how many kids actually earn diplomas.

Early numbers show of the five performance levels CPS gives schools, not ONE of the new for-profit schools made it into the top two.

Not all of the new for-profit alternative schools have been open long enough to get a rating. But of those that have been, most landed at the bottom of the district’s rankings. None earned a 1 or 1+ rating.

Miron said low-performing schools should spend more, not less, directly on students. Plus, with alternative schools, the students enrolling are some of the most at-risk and vulnerable in the city.

“If these are such a good idea, why aren’t we doing it with some suburban schools serving middle-class families?” he asks. “Yet we see this experimentation with private companies with pretty drastically new ideas that end up being more beneficial for profit margin than actual performance.”

Harvard’s Jack Donahue echoed Miron’s concerns about quality.

“The real thing to worry about here is the weaknesses of the measures of value, rather than the fact that somebody might be making a buck,” he said.

This story was co-reported with Sarah Karp of Catalyst Chicago. Becky Vevea is an education reporter for WBEZ. Follow her @WBEZeducation.

A previous version of this article incorrectly identified the school at which John ‘Jack’ Donahue works. It is Harvard University’s John F. Kennedy School of Government.