Saturday, February 25, 2012

Cyber Schools via SB 619: A Cost Effective Opportunity - If We Do It Intelligently

The ability for students to take K-12 courses online is a good thing. Many advanced students can earn credits and advance their college readiness and/or high school graduation date. Struggling students can earn credits to catch up on courses they may have previously failed or to make up for the credits they missed by failing one or more courses. Online learning offers another way to learn that fits some students learning styles better than the traditional classroom.


To enhance the use of online learning in our traditional public schools through a “blended model”, I will support the following:

  1. Eliminate the need for getting “seat time waivers”, by requiring MDOE to establish an after the fact reporting system instead, based on previously adopted qualifications criteria. HB 5392 (Rep. O’Brien) may be the vehicle to get this accomplished.

  2. Require the Michigan Department of Education to execute a Request for Proposal process for online course providers to bid to provide individual courses that public schools across the state can purchase, similar to how MIDeal works for trucks and other items. This has the potential to lower the costs of individual courses students may access to accelerate their progress or make up classes needed to graduate.

  3. Amend the Public Employee Relations Act (PERA) to make the offering of online classes, the awarding of credits for online classes or the supervision of students taking online classes an impermissible subject of bargaining. Unless this is so designated, as a “work condition”, it is a mandatory subject of bargaining under current collective bargaining law, and often used as an impediment for school districts to implement online learning, other than as a “pilot program” which currently has that protection.

    MCL 423.215  currently states the following is an impermissible subject of bargaining: 
    “Decisions concerning use of experimental or pilot programs and staffing of experimental or pilot programs and decisions concerning use of technology to deliver educational programs and services and staffing to provide the technology, or the impact of these decisions on individual employees or the bargaining unit.”

    The language regarding cyber learning, however, when mixed in with the pilot program language, has been unclear and a continuing point of contention in negotiations with teacher unions. Clarity would help.

Another benefit of cyber schools is that they may be more efficient and thus cost less per student. This is a good thing. But herein lies an issue. "For state aid purposes, the State School Aid Act provides that the per pupil foundation allowance for PSAs (including cyber schools) is equal to the foundation allowance of the school district in which the PSA school is located, subject to a maximum PSA foundation allowance of $7,110." House Fiscal Agency Memorandum dated 12-5-2011

The simple truth is, we really don't know just what the costs of the full-time online schools are. But, the sources noted in the Appendix below appear to indicate that the full-time online schools can and do operated at a lower cost per student. If that is true, as a fiscal conservative, it does not appear that we should pay any more than we have to.

It is important when setting up an entirely new system of delivering education that the question be asked, “How should this be funded? Is following the same payment system as for the traditional public school wise if the cyber schools have an entirely different cost structure?”


To the extent that the cyber schools can offer the courses at lower cost, the profits would go to the providers. Now, there is nothing wrong or evil about profits in a free enterprise system, but profits offered in a price fixed system are not good. Prices fixed at higher than market clearing prices will not result in an optimal allocation of resources. The supply will proliferate and drain money from the traditional public schools. This is particularly true when SB 619 would allow the online schools to cherry pick the lowest cost grade levels to offer, to maximize profits. My preference would be that if we can get these services at a lower cost for equal or better quality, the savings should go to the taxpayers.

Differing Costs by Grade Level. It is generally acknowledged that it costs different amounts of money to educate an elementary student than a middle school student or a high school student. Middle and high schools offer more extracurricular activities, such as sports, band and drama. A higher proportion of elementary students ride the busses than high school students, many of whom drive themselves to school, and thus cost more for bussing per student. Middle and high schools typically require more administrators per student than elementary schools. The differences go on and on. Nonetheless, when it comes to funding traditional public schools, the foundation grant per student is the same, regardless of the mix of elementary, middle and high school students in a school or school district. Over time, the schools have simply managed their expenses within the funds allocated to them, accommodating the cost differences. Whether traditional public schools should be allocated different amounts for different levels of students is an open question, but one left for another day. Nonetheless, the question is very pertinent for online cyber schools.

Charter Schools? This difference in cost of differing grades issue has been brought up in the context of regular charter schools, also known as public school academies. To the extent that many charters only offer elementary school grades, critics charge that they are unfair competition with traditional public schools because the charters only admit the students that they can educate cheaply. Also, charter school are not required to participate in the Michigan Public School Employees Retirement System, into which the traditional public schools have to pay 24.46% of wages paid into the system in the 2011-12 school year and projected to be 27.37% in the coming school year unless reforms are made. Charter supporters counter with the argument that the charters can only receive the lowest foundation grant that any traditional public school receives and that, in contrast with traditional public schools, charters cannot levy school bond millages for facilities, but must pay for the brick and mortar through the foundation grant funds. The ultimate resolution of this significant argument is also left for another day.


A Procurement Model Option? I have explored the possibility of some system under which online education providers would be required to bid to provide the services so that the costs to the state reflect the actual costs plus reasonable profit to the providers. What I would like to create is a free market, competitive system where price discovery occurs naturally. A bidding process would require each provider to adjust its bids according to those different costs of providing the service for whatever combination of education services it seeks to provide or risk being outbid. However, so far I have not come up with how this could be done.

Arbitrary Foundation Grant? Alternatively, an arbitrary "foundation grant" amount will be paid to the cyber schools. If set as the basic foundation grant received by traditional public schools, I don’t know why we would want to pay a Cadillac price for an Chevy Impala product. That simply is not fighting for the hardworking taxpayer, paying more than we have to.


Pay for Performance? Another alternative would be for the cyber schools to only get paid for courses successfully completed by the students. Successfully completing an online course is difficult, taking a great deal of discipline, so merely enrolling in courses, and the cyber schools receiving foundation grants simply based on enrollment does not appear to be the answer. If this is based on the schools' self-reported success, this would put an incentive to bias results towards "successful completion" even when students did not learn. On the other hand, there are many courses for which there are no third party testing services to verify the students learning. Nonetheless, without some such "payment for performance", I fear that we will not have the quality of performance taxpayers have a right to expect for the use of their taxpayer funds. It will be argued that good performance is not always achieved in the traditional public schools either, but that does not excuse simply opening up a new potential avenue for student failure while potentially wasting taxpayer money.


Compromise Sought. I have previously said that until I see that some of these concerns are addressed, I will be a "No" vote on SB 619. I now seek a compromise.


I have learned that the amount paid for online learning is entirely a function of the adoption of the School Aid Bill in the Appropriations process. As such, there is no way within SB 619 to set the appropriate amount cyber schools should be paid, whatever that is. So, I will be proposing an amendment to require the Michigan Department of Education, together with the House and Senate Fiscal Agencies (and perhaps the Department of Treasury and the Michigan Department of Technology, Management & Budget (DTMB)) to study and report on the costs of online learning, to provide objective information on the proper level of funding for these programs in the future. Perhaps this will lead to a more rational approach to the issue of funding online programs than I currently hear.

Appendix: Costs of Online Learning

First, we should distinguish between “supplemental online” courses which are purchased individually by school districts or others from full-time online schools. Supplemental online courses are usually courses with no teacher on the other end, other than the one who previously narrated the recorded lesson. The student is usually overseen be some school employee, usually simply in a monitoring role (although there seems to be some question of whether this needs to be a certified teacher monitoring the students if this is being done in school in the absence of a seat time waiver). The students taking the supplemental courses are usually doing so to make up credits for courses they had previously failed. The school the student is enrolled is responsible for all reporting, etc.

The full-time online schools, on the other hand:

  • Must adhere to all state and federal accountability req. (State Assess., NCLB, etc.)
  • Special Needs Accommodations (all)
  • Student Support Services (Enrollment, Counseling, Extra-curriculars)
  • Serve all grade levels
  • Data compilation (Tracking students’ academic records)
  • Full-time Staff (benefits)
  • Student Technology

Now, let’s explore the full time online cyber schools’ cost structure, from what little research currently exists.

1. One study estimated that about $1.6 million was needed for start-up money for a full time virtual school, and then between $3650 and $8300 per student thereafter, depending on program type, size, and quality, as well as level of investment into research, development and innovation. See “Costs and Funding of Virtual Schools”, by Augenblick, Palaich & Associates, October, 2006,

2. Colorado Cyberschools Enrollment, Costs and Funding Per the Colorado Cyberschool Association (2004), they estimated the costs as follows:

  • Curriculum/content: $1080
  • Instruction: $2400
  • Course Mgmt/technology $750
  • Student Support $1580
  • School Admin $700
  • District Admin $700
  • The estimated total cost per student $7210

The report also stated the following payments in various states:

  • Florida Virtual School: $4,820 per FTE (03-04); FLVS receives funding only for course completions (similar to Texas)
  • Minnesota: Full FTE funding at the school district level or$4,600 for students in grades one through six, and $6,000 for students in grades seven through twelve. Based on per course apportionment.
  • California: online programs receive FTE funding (termed ADA for Average Daily Attendance in California) at the level of the school district’s “normal” funding.
  • Wisconsin: 12 virtual school; $5845 per student
  • Ohio: Full-time, multi-district programs. State funding follows the student, districts lose most of the state foundation funding, but none of the local funding. Receive state funds directly from the state; these funds have been transferred from school district allocations

3. provided the following chart, based on $6500 per student:


This chart reveals a significant opportunity to lower costs long run through economies of scale. As the number of students an online provider serves, the average cost per student for technology and curriculum goes down significantly as those costs are mostly fixed costs. One does not have to recreate the curriculum for each student. The marginal cost per student would be the costs of the textbooks (hard copy or lease costs for online versions if not created inhouse), some other materials, and the computer and Internet access. These would hardly reach 44% of the $6500 or $2,850 per student.

4. K12's Flood is reported in a 2004 article to have said “that states need to allocate approximately $4,800 to $5,000 per student to adequately support virtual schools.” Virtual-School Costs Under Siege, April, 2004.

5. The Wisconsin Virtual Academy employed one teacher for every forty-two students, producing above-average student achievement for half the cost of normal per-pupil expenditures ($5,500 as opposed to $9,000-$13,000). The Rise of Cyber-Schools, Online Education and Its Enemies, by Liam Julian.

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