Special Report

States Face Virtual School Financing Challenges

By Michelle R. Davis — March 12, 2012 7 min read
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Before the Montana Digital Academy opened its virtual doors two years ago, about 200 students in the state were taking online classes.

At its launch in the 2010-11 school year, the state-sponsored digital school was flooded with more than 2,000 student enrollments. By the end of this school year, enrollment is likely to spike to 7,000.

While the popularity of the program shows that it’s needed in Montana, line-item budget funding—subject to the whims of politics and based on estimated enrollment for the program—makes it nearly impossible to sustain that type of growth over time, says Robert Currie, the school’s executive director.

“This is different from a typical K-12 school model. More students doesn’t equate to more funding for us,” he said. “If anything it’s just the opposite.”

Across the country, many of the nation’s 40 state-sponsored virtual schools are grappling with variations on the funding issue. Funding structures differ from state to state, and are often in flux as educators and lawmakers come to grips with an entity that sometimes looks like a public school and sometimes looks more like a business. Many are seeking sustainable methods of state support while anticipating significant growth; others say existing aid structures are hindering expansion.

“The big issue [that state-sponsored virtual schools] are struggling with is moving from a legislative line item to some form of sustainability now that they have outgrown the budget they began with,” says Butch Gemin, a senior consultant with the Evergreen Education Group, a research firm based in Durango, Colo.

“They’re all thinking about how to make that transition,” says Gemin, who was a co-author of the 2011 “Keeping Pace With K-12 Online Learning” report.

Like many state-financed virtual schools, the Montana Digital Academy receives its money through a line item in the state budget. That funding level is based on an estimate of how many students the school expects to serve, Currie says. Since state lawmakers in Montana meet only every two years, the school’s estimate has to cover a two-year period.

Virtual Schools

These maps detail state virtual schools and multidistrict virtual schools and include enrollment figures.


SOURCE: “Keeping Pace With K-12 Online Learning”

As it opened, Currie estimated the school would have about 2,500 enrollments annually for the following two school years, but by the end of the first year the school saw almost double that number. Enrollment is up even more this year, so the school must use the $2.3 million lawmakers set aside for two years’ worth of courses to serve thousands more students than anticipated.

Currie says he’s looking at the possibility of asking for a mid-budget-cycle supplement from lawmakers and considering different funding models for the future.

“We’re analyzing everything to determine what is a sustainable model,” he says.

Texas recently confronted a similar situation and started this school year with a new funding structure to try to address the challenge.

Before the 2011-12 academic year, students could take supplemental courses through the Texas Virtual School Network offered by a variety of online course providers. The state paid the cost of the course.

But as more students tapped in to those courses, the state budget couldn’t keep up. So lawmakers adopted a fee model, which has districts paying out of pocket—up to $400 per course—for students to take virtual classes offered through the virtual network by third-party providers.

Barbara Smith, the project director for the Texas Virtual School Network, says that the fee setup will allow the program to be increasingly self-supporting, but that the network saw a “tremendous dip” in enrollment when new pricing kicked in. However, she says, a steady enrollment climb (the number was at 8,000 by the end of the 2010-11 school year) is under way as districts become accustomed to paying for courses.

Smith says she viewed the initial underwriting of virtual courses by the state as a way to get districts to try something new.

“We really believe the legislative intent there was to let districts and students get some buy-in to virtual learning,” she says. “I looked at it as seed money and always knew the state would try to move to a different model.”

Having a virtual program that supports itself is key, both for growth and for making sure that accountability measures are in place, Smith says. The Texas Virtual School Network does not create or provide any of the courses itself, but vets all courses offered by third-party providers to ensure they meet state curriculum standards and the standards of the Vienna, Va.-based International Association for K-12 Online Learning, or iNACOL.

“We make sure there’s a quality product,” Smith says.

Myk Garn, the director of educational technology for the Southern Regional Education Board, in Atlanta, says he believes many state-sponsored virtual schools should be viewed in a similar light: as methods of getting districts and students to try virtual courses in a state-endorsed environment.

But he says it’s clear those models must evolve, both in funding mechanisms and, in some cases, possibly by playing a lesser or more advisory role as districts begin to develop their own virtual programs.

“These initiatives have really been kind of a catalyst,” Garn says. “They’re typically spearheaded by a governor and get line-item funding as a sort of pilot proof of concept.”

Funding uncertainty can also have an impact on accountability and quality, says Jamey Fitzpatrick, the president and chief executive officer of the Michigan Virtual University, based in Lansing, which oversees the Michigan Virtual School.

The virtual school charges a fee for its courses that is paid for by school districts out of their per-pupil state funding, though often districts, or coalitions of districts, with high numbers of students receive a discount. Sometimes, especially in the summer, parents pay for students to take virtual courses.

The Michigan school, which has about 20,000 enrollments and continues to increase its number of students, also receives operational funding from the state legislature, about $2.6 million this year.

But that funding “is highly dependent on what happens year in and year out in the legislative and policy arena,” Fitzpatrick says. Not having a stable funding source for such a growing enterprise makes it difficult to invest in accountability measures and continuously improve courses and methods of delivery, he says.

“The biggest disadvantage of our current funding formula for us is our inability to do long-range planning,” he says. “I have no idea what my budget will be in 2014. I can estimate and hope, but with very little assurances, we’re inhibited in our long-term strategic plans.”

Some of the larger state virtual schools are now considering alternative methods of driving revenue to their programs, hoping to follow the template of the Florida Virtual School, the nation’s oldest virtual program. The FLVS formed a separate nonprofit global-services division to serve international students on a tuition basis and uses that revenue to benefit the free service for Florida’s public school students.

Michigan Virtual is weighing the idea of taking on corporate and foundation partners to help update courses and provide additional financial support, and recently hired a director of fund development to spur that endeavor, Fitzpatrick says.

“One of our more popular courses is digital photography and it’s good, but if we had a partnership with Nikon or Canon, it would probably be a stronger course,” he says.

Predicting Enrollments

Christina Clayton, the director of virtual learning for the Georgia Virtual School, says her school gets funding upfront based on the number of expected enrollments. That money comes from a percentage of per-pupil state funding flowing to districts. If the virtual school has a midyear spike in enrollment, Clayton can return to the legislature and ask for supplemental funding.

The funding model makes school districts uncomfortable, though, because “they perceive it is coming out of their budget,” says Clayton. That perception, in turn, causes districts to think twice about sending students to Georgia Virtual, she says.

But to continue to grow, hire highly qualified teachers, and ensure that courses are truly educating students, “we’ve got to take the handcuffs off,” argues Clayton, who is pushing to find ways for more students to get online learning opportunities.

She is also eyeing a new finance model that eventually would allow the virtual school to move away from line-item funding to a fee-based system.

“The capitalist in me is not trying to make money, but we’re tired of having a handout,” Clayton says. “From an infrastructure standpoint, we think we’ve figured out what it takes.”


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