While local school districts continue to jettison staff over rising pension and health care costs, the real winner in the equation appears to not be students, teachers or taxpayers, but private equity firms.
Carlisle Area School District’s board will vote in the coming weeks on a proposal to cut the remaining teachers’ aides that are directly employed by the district, and offer to re-hire them through Education Solutions Services, a private staffing company.
Flat levels of state assistance have combined with rising pension and health costs — Carlisle’ self-funded health plan ran $1.7 million in the red last year, according to the district — to put school districts in a tough spot.
Taking employees off the district’s payroll and placing them with ESS instead means aides don’t have to be offered the same retirement and health care that teachers receive.
But not all the savings are going toward the district’s bottom line.
ESS is owned, at least in part, by Nautic Partners, a private equity firm. While it’s true that ESS offers to cut school districts’ overhead costs, Nautic’s webpage for its portfolio of “outsourced services” investments offers a much different mission, with a tagline that reads “profit by a wider margin.”
ESS did not respond to requests for comment.
The privatization of school services, such as buses, food service, janitorial and now teaching assistants, isn’t a new phenomenon. But the sector is increasingly being occupied by large investment groups who see a chance to take a healthy return off the top of the windfall savings realized when districts outsource and cut benefits.
“At the end of the day, it doesn’t come out of the pockets of any entity other than the workers themselves,” said Mark Price, a labor economist with the Keystone Research Institute and a critic of public school privatization in Pennsylvania.
“The danger is not only do you end up paying workers less, you end up paying more in profits to these firms in the long run,” Price said.
But districts like Carlisle say they ultimately have no choice. Shifting employees to private contractors is the only way to get out of pension and health requirements that districts cannot afford.
“The cost structure is just unsustainable under the current conditions,” said Shawn Farr, the district’s director of finance. “It forces our hand. It’s not like we want to contract out these employees.”
Even if the additional outsourcing for aides is approved, Carlisle schools are still looking at a $3 million budget gap, assuming no other changes, with $84.3 million in revenues to cover $87.3 million in expenses.
The district’s primary means of revenue is property tax, but this can’t be increased beyond the state’s Act 1 index, which caps tax hikes at a rate determined by consumer prices and real estate markets.
For the 2019-20 budget year, that cap is 3 percent, or about $1.3 million in new revenue, according to Farr’s calculations. This means that tax hikes alone are an unsustainable revenue model, given that health insurance premiums increased 15 percent this year alone, and will go up another 14 percent in the next budget year, according to Farr.
The district is self-insured, maintaining its own pool of money through South Central Trust that pays out medical claims. But in the 2017-18 fiscal year, those claims exceeded premiums by $1.7 million.
The driver isn’t doctors’ visits per se, Farr said, its prescription drugs, particularly school district employees who require medicine that is proprietary, giving pharmaceutical companies the power to dictate cost, free of competition.
The district insures roughly 550 employees, Farr said, which adds up to about 1,200 people when one includes spouses and children for employees who have chosen family coverage. This patient base required about 10,000 prescriptions last year, at a total cost of over $1.6 million, a 35 percent increase from the prior year, versus a 19 percent increase for nonpharmaceutical medical claims.
The vast majority of prescriptions were incredibly cheap, Farr said. About $1 million, or 61 percent of the total prescription cost, was incurred by just 147 prescriptions, Farr said.
“The prescription drug costs are out of control,” Farr said. “The rest of the medical expenses are still going up but there’s more competition controlling that. With some of the prescriptions, we’re really at the mercy of the pharmaceutical companies.”
The savings from outsourcing employees is entirely on the benefits side, as opposed to wages.
Carlisle school district can set the rate of pay for the positions it fills through ESS, Farr said, and the current proposed pay schedule anticipates that all but four of the 67 aides expected to be outsourced will see an increase in their daily pay rate. The scale varies between $80 and $100 per day for a 6.5-hour work day.
Since 2017, the district has hired new aides and support staff through ESS, but 83 aides hired prior to that, many with decades of experience, are still on the district’s payroll. This number is expected to drop to 67 through attrition by the start of the 2019-20 school year, Farr said.
But the district still expects to save about $600,000 by transferring the remaining 67 employees, or almost $9,000 per aide per year. Put simply, it’s because the health plan offered through ESS is much worse.
“Even if we get a little bit [of an hourly raise] over what we’re making now, we’re still losing money in the long term,” said Leslie Paine, and aide in Mount Holly Springs.
Paine said she expects to lose about $3,000 per year in insurance costs if her job is outsourced from the district to ESS’s payrolls, based on the insurance plan being provided to staff who have been hired under ESS.
“That’s only if I don’t go to the doctor at all, or if I don’t need any prescriptions. ... That’s because the insurance through ESS is less than par. It’s not worth having,” Paine said.
The health plan Paine and other aides have referenced, a copy of which was provided to The Sentinel, charges employees on a weekly basis for one of two schedules of benefits, which have a daily dollar limit and a yearly limit on the number of days that can be used.
Under the least expensive plan, employees pay $24.48 weekly for an individual, or up $83.40 for a family.
That plan, for instance, pays up to $25 per day for prescription drugs, and only pays out a maximum of seven days per year.
ESS did not respond to request for information regarding its health plan or other employment practices.
The company appears to be one of the largest school staffing companies in the United States, and is based out of Tennessee. In July 2017, ESS merged with Source4Teachers, another educational staffing company that was financed by Nautic Partners. The combined operation is now listed as Source4Solutions LLC on Nautic’s portfolio page.
“The combined company will serve nearly 300 districts across 10 states and employ approximately 40,000 educational professionals and 230 corporate staff members,” according to Nautic’s 2017 press release.
That release also stated that ESS was founded in 2016 by the same management group that partnered with Nautic on GCA Services Group, a janitorial staffing firm specializing in schools. Nautic sold GCA to the Blackstone Group in 2012.
It’s impossible to tell what exactly a private equity firm’s return on investment on a school outsourcing company is. But ESS’s current contract with Carlisle schools, for newer aides and staff, includes a 31 percent premium on pay, Farr said.
If the district specifies a given aide’s pay at $100 per day, Farr said, it pays ESS $131, with that $31 going toward ESS’s corporate management costs and profit margin.
While this may seem like a lot of taxpayer dollars going out the door, it’s a smaller margin than the district would be paying in benefits if it didn’t outsource.
The state’s pension requirements alone cost 34 cents on every dollar of employee pay, Farr said, meaning that ESS’s take is still smaller than the state pension system, even before one includes the medical side.
In this way, Pennsylvania, by delaying the amortization of new benefits during the 2000s and causing the current pension cost balloon, has inadvertently pushed taxpayer dollars out of the hands of the state’s public employees and into the hands of out-of-state outsourcing firms.
“I sympathize with the districts,” Price said. “Part of what’s driving this trend is that the state has not done it’s fair share in funding education.”
While the outsourcing trend has hit teachers’ aides hard only in the past few years, schools have been outsourcing for decades, often starting with bus services.
In 2012, Price co-authored a study on bus outsourcing by Pennsylvania school districts, which found that, while bus outsourcing may save money short-term, it rapidly becomes less efficient as time goes on.
School districts that spent a greater proportion of their transportation budget on outsourced services, per state education budget data analyzed by Price, had greater per-pupil transportation costs, and those costs continued to climb at an equal or greater rate throughout the study period of 1986 to 2008, compared to districts whose outsourcing was proportionally lower.
Using these efficiency rates, and factoring in the relative impact of school district population density and wealth, the average district’s transportation costs would be about 13 percent lower if it moved from 68 percent of its transit services being contracted out — the average outsourcing rate during the study period — to a fully in-house model.
Data on outsourcing for nontransportation services is scarce. In 2008, a paper published through the Education Policy Research Institute at Arizona State University and the Education and Public Interest Center at the University of Colorado-Boulder said the most commonly-cited data was generated by groups that were either explicitly pro- or anti-privatization.
But the “lack of empirical data is unlikely to slow the growth of privatization,” the authors found.
One issue with the privatization and outsourcing debate is that while short-term savings for school districts are easy to model, long-term harm is more difficult to predict.
This is especially so when one views outsourcing through the lens of the local economy as a whole.
While the school district may be paying less for a given service, thus reducing its burden on local taxpayers, a greater proportion of the cost that remains is being bled off to, in the case of ESS, its corporate management in Tennessee and its capital ownership in Rhode Island.
Put another way, although the school may be paying more by keeping services in house, that value stays entirely local, in the form of higher wages, better health benefits and greater retirement equity for locally based employees.
An analysis from Daphne Greenwood at the University of Colorado-Colorado Springs cited the link between outsourcing and the decline of sustainable, middle-class jobs, as well as heightened public benefits use in certain sectors. A 2010 study, for instance, found that outsourced school cafeteria workers in California used an average of $1,743 per year in welfare benefits.
While no such data appears to exist for Pennsylvania, use of public benefits is explicitly part of ESS’s model, according to school administrators.
Namely, because of state labor statutes, public schools cannot lay off aides over the summer. Instead, they are furloughed, with a guarantee of being offered work again in the fall, and thus do not qualify for unemployment benefits.
This is not a requirement for private contractors. In fact, claiming unemployment over the summer through ESS is an explicit part of the transition deal that Carlisle schools would present to their remaining aides if the board votes for outsourcing, Farr said.
Big Spring School District also uses ESS for a number of services, including outsourced aides, although unlike Carlisle, aides were not required to switch to ESS, and some are still on the district’s payroll, according to Superintendent Rich Fry.
Those who stayed in the district’s direct employment, Fry said, were aides with 10 or more years’ experience who had higher pay rates and worked enough hours to qualify for benefits. Less experienced aides, who worked 5.5-hour shifts, tended to voluntarily go to ESS, Fry said.
Those aides weren’t working enough hours to qualify for benefits, Fry said, meaning that summer unemployment checks were the only outstanding difference, and was a significant incentive to be employed under the outsourcing company rather than the district.
Big Spring inked a four-year contract with ESS, Fry said, with ESS committing to keeping its costs under a 1 percent per-year increase.
This could go up when the contract is re-negotiated — Price’s study and others identified issues with outsourcing companies “low-balling” their initial terms.
But Fry said that, for Pennsylvania schools in recent years, rate increases by private contractors are less than health insurance hikes and the pension rates foisted on the districts by the state. Further, the districts can plan for these in multiyear contracts with vendors like ESS.
“It still pales in comparison to the cost increases from pension and health care,” Fry said.
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