Private equity investment is expanding in K-12 education. This policy brief demonstrates the threats presented by the entry of private equity actors into K-12 education—threats magnified by the impending launch of a new federal school voucher program known as the Federal Scholarship Tax Credit (FSTC) or Education Freedom Tax Credit (EFTC). The FSTC/EFTC is estimated to cost potentially up to $100 billion annually.
Private equity is an investment model in which private equity firms pool money from institutional investors and wealthy individuals and combine it with borrowed funds to buy companies. These debt-financed acquisitions, known as leveraged buyouts, typically leave the acquired company responsible for repaying much of the debt used to finance its purchase. The firms then seek to increase the company’s value through strategies such as expanding revenue, cutting personnel and other costs, restructuring operations, or making additional acquisitions. They typically seek to sell the company or their stake within several years for a profit.
State participation in the federal voucher program in the form of FSTC/EFTC risks statutorily solidifying privatization into public schools at an entirely new scale. Statutorily embedded revenue streams become potential dependable cash flow for private equity firms seeking to enter a new market or expand their footprint in it.
As evidenced in other sectors targeted by private equity firms, such as housing and healthcare, significant responsibilities can shift from trusted public and nonprofit agencies to unaccountable external firms. This is already resulting in the institutional abandonment of children and families through bankruptcies and outright sudden closures of and by private equity-backed providers.
CEA’s policy brief:
- Addresses the impact of private equity investment on K-12 finances and resource allocations
- Demonstrates how private equity-backed education providers are likely to lead to diminished pedagogical, counseling, and therapeutic servicing
- Identifies program areas—with a detailed focus on special education and tutoring—that, among others, are increasingly being provided on a contractual basis to school districts by private equity firms
- Explores the new federal school voucher program, including contracting incentives and the key private equity investment firms (e.g., The Vistria Group, Leonard Green & Partners, American Securities Inc., A-Street Capital, and others) that stand to benefit from the new program
- Assesses the impact of shifting or outsourcing such services from in-district personnel to external private equity firms
The report details the following policy recommendations for state and local decision-makers to address the risks of current and potential future private equity investment in K-12 public education:
- Reject Participation in the Federal Tax Credit Voucher Program. The new federal voucher plan is a gateway to privatizing public education instructional services.
- Increase Transparency of BOE Contracts with Private Providers. Make contracts readily accessible on board of education websites.
- Enhance District-Provided Services. Build school districts’ capacity to provide more services in-house and increase accountability for private providers.
- Establish Outplacement Price Controls. Ensure that special education outplacement fees charged to school districts cannot exceed state rate schedules.
- Consider Educator Fair Wage Protections. Protect against displacement of school district employees and private providers undercutting prices using non-certified staff.
- Require Educator Expertise in Education Service Companies. Require boards that oversee instructional services provided to public school children to primarily consist of members with associated licensure, as done in the medical field.
- Regulate Special Education Provider Mergers. Extend the reporting, monitoring, and regulating of mergers and acquisitions to special education.
- Prohibit School Contracts with Joint Ventures. Restrict contracts funding joint ventures entered between nonprofit providers and for-profit firms.
- Expand Sale-Leaseback Prohibitions. Prevent the practice of transferring property to entities who then lease back the property at inflated rates. The state should consider extending the ban on sale-leasebacks from hospitals to private provider K-12 associated entities, such as special education private providers. This may help prevent future overnight closures that harm children and force families and school districts to scramble. Proactively doing so may also mitigate predatory behavior from private equity-owned companies in special education.
- Prohibit Noncompete-like Contractual Provisions. Prevent contracts between vendors and school districts that disallow personnel employed by vendors and contractors from being hired directly by school districts. Such provisions inhibit school districts from building capacity to resolve shortages and make school districts increasingly reliant on private providers.
Future Considerations
Assess Private Equity Control of Public Schools. Determine how embedded private equity firms are in the delivery of public education services at the district and state levels. What is the totality of contracts and the exposure of public education to associated risks?
Assess Private Equity Control of Early Childhood. Assess the impact of private equity involvement in the early childhood birth-to-five sector and determine the potential impact on K-12 public schools. Of the ten largest childcare companies in the United States, eight are private equity-owned. The experience there could be instructive for what is on the horizon for public schools.
Assess State Voucher Program Payments to Private Equity. Assess how existing school voucher systems operating across the country are entwined with private equity. What have the effects of these been on public schools?
Add Anti-Privatization and Fair Labor Safeguards to Public Pensions. Determining how public pensions can operate with anti-privatization safeguards would further protect communities and workers from destabilizing outsourcing. More specifically, such would safeguard public pensions from being pooled into private equity funds that invest in asset-stripping privatizing enterprises that in turn dismantle public services.
Key Takeaways
- Private equity’s involvement in education nearly doubled from 2019 through the pandemic to $14 billion across 150 deals in 2021 alone, creating a more explosive version of the privatization in schools than in the previous decade.
- Decisions over the long-term goals and day-to-day operations in schools could be increasingly concentrated in the hands of finance and technology investors as opposed to educators.
- When private equity companies engage in market consolidation, the result is often higher prices, increased health and safety violations, significant staff reductions, inadequate provision of requisite training and professional development, overnight closures, and elimination of required services. Private equity could have potentially devastating impacts on public education.
- There are over 50 individuals who are associated with or serve as partners in private equity firms hold high-level formal and informal positions affiliated with various federal agencies. For example, a chief strategist and senior advisor to Secretary of Education Linda McMahon has been Penny Schwinn, who also serves as operating partner of Vistria Group, among the leading private equity firms engaged in comprehensive K-12 education investment strategy.
- Private equity firms controlling the provision of autism services have exhibited a pattern of maximizing revenue by cutting critical services. The new FSTC/EFTC voucher scheme makes nearly certain that these practices will become emdedded in public education, to the detriment of students, educators, and communities.
- Federally subsidized scholarship granting organizations (SGOs) are the brokers, or middlemen, through whom the new federal voucher program will operate, and there is a growing concern that the federal voucher program could result in many school district resources, capital assets, activities, programs, expertise, and duties being outsourced to private equity firms.
- Private equity-owned companies are already monetizing educational services such as special education, school transportation, tutoring, and curriculum and are well-positioned to profit from federally subsidized scholarship granting organizations (SGOs).
- With the estimated annual impact of the proposed federal tax credit exceeding $100 billion, the flow of funds from public schools to private equity firms could be significant.
- The research on private equity’s incursion into healthcare, housing, and other areas of the public sector paints a clear picture of what could happen under the federal tax credit voucher program.
Read CEA’s full report, Private Equity in Connecticut K-12 Education.