In August 2024, the business magazine Inc. released its annual list of the top 5,000 fastest-growing private companies in the United States. At 815th, a burgeoning upstart called ClassWallet cracked the list’s top 20 percent for the third straight year. By expanding its operations managing school voucher programs for states across the country, earnings for the Florida company grew by 610 percent over the previous three years.
Founded in 2014, ClassWallet now has more than 200 employees and has contracts to administer school vouchers and other educational programs in 18 states through its “digital wallet” platform.
Indeed, managing school vouchers has become a big business. And, as Governor Greg Abbott and the Republican-controlled Texas Legislature gear up to pass their own program this session, private companies like ClassWallet are descending on the Capitol to lobby for the vouchers legislation and the lucrative contracts it could generate. This comes as other states have drawn scrutiny over myriad problems with the private contractors, including ClassWallet, they’ve hired to administer their voucher programs.
Senate Bill 2, which sailed through the upper chamber early last month, is a universal school voucher proposal that would give students $10,000 a year to attend private school or $2,000 for homeschooling. Lawmakers have initially set aside $1 billion in funding for the Texas school voucher program in 2027, though the Senate bill’s fiscal analysis says the program’s net cost could balloon to $3.8 billion by 2030.
The bill stipulates that up to 5 percent of appropriated funds may go to pay up to five outside vendors like ClassWallet, which the legislation calls “certified educational assistance organizations” (CEAOs), to act as middlemen between the state, parents, and private schools by processing program applications and voucher payments. If the bill were to pass, these private companies could soon be reeling in tens and even hundreds of millions of taxpayer dollars per year.
These private vendors could, under the bill, be tasked with managing a complex application process, connecting parents with private schools and education vendors, accepting payments, and “verify[ing] that program funding is used only for approved education-related expenses.”
“They’re a for-profit pass-through, which just means the state appropriates dollars, the vendor holds it, they reserve a small fee for themselves, and then they pass it on to the consumer,” Josh Cowen, education policy professor at Michigan State University and author of the book The Privateers: How Billionaires Created a Culture War and Sold School Vouchers, told the Texas Observer.
The CEAOs would have to be a for-profit or non-profit entity registered to do business in the state. The comptroller—who will likely soon be an Abbott appointee given Glenn Hegar’s pending departure—would have wide latitude to oversee the program, including awarding contracts to the CEAOs. The agency would also be able to use up to 3 percent of total funds for its own administrative costs. The comptroller and CEAOs would both be allowed to solicit donations from “any public or private source for any expenses related to administration of the program.”
On the Senate floor back in early February, SB 2 author Senator Brandon Creighton acknowledged issues that other states have had with outsourcing voucher management to private vendors. He passed amendments that he said were meant to address some of those concerns, including prohibiting CEAOs from charging transaction fees to program recipients. “In our discussions with state leaders in states with [education savings accounts], there’s a growing concern about [CEAOs] that take a given percentage of each transaction,” Creighton said.
Creighton also passed an amendment that would allow the comptroller to perform any of the CEAOs’ duties if it’s determined that the agency could do it more efficiently or at a lower cost.
Senator José Menéndez, a San Antonio Democrat, offered an amendment to subject CEAOs to existing state conduct and conflict of interest rules, but it was struck down.
Representative Brad Buckley, the Republican chair of the lower chamber’s Public Education Committee, filed a House version of the school vouchers legislation after the Senate passed its bill. House Bill 3 includes substantively similar language regarding CEAOs. It would give the same up-to-3 percent of the program’s appropriated funds to the comptroller and maximum 5 percent to CEAOs. The bill differs from the Senate’s by capping the per-student private school voucher amount at 85 percent of per-student public school funding from state and local sources—a bit more than $10,000 yearly, according to the bill’s fiscal note released Tuesday—along with other differences in who is prioritized for vouchers. (The fiscal note projects the House bill’s overall cost as slightly higher than the Senate’s.)
The House public education committee is set for a hearing on the voucher bill on Tuesday.
The state’s proposed creation of state-funded middlemen to administer the massive new program, while subject to unclear levels of oversight and accountability, is one of many mounting concerns raised by voucher opponents—including conservatives who see it as an invitation for waste and abuse of taxpayer funds.
“This is a vendor bill,” said Hollie Plemons, an education activist and GOP precinct chair in Tarrant County, in her testimony before the Senate education committee in January. Plemmons called it a “subsidy” for businesses and criticized Creighton, saying, “You are going to be taking our tax dollars … for each one of these [CEAO] businesses.”
Amy Fennell, a former city council member of Willow Park in North Texas and a Republican, told the Observer: “It’s an industry that would not exist without a government subsidy.”
Fennell has been organizing other conservatives against school vouchers in Texas. “It’s more government, more bureaucracy, more money, and there’s no oversight. And it’s taxation without representation,” Fennell said. “The taxpayers don’t get to pick who these private companies are that our tax dollars are going into. So that is not a free market.”
Cowen, the anti-voucher book author, said the expansion of the for-profit educational assistance industry is a relatively recent development. As of about five years ago, state school voucher programs were mostly managed by state revenue agencies or nonprofit organizations. But, these days, ClassWallet is not alone in capitalizing on growing school voucher programs across states. Other companies include Odyssey, Student First Technologies, and Merit International.
As several states have passed school voucher laws in recent years, these aspiring vendors have fiercely competed to secure lucrative contracts to administer the new programs. That often means paying well-connected lobbyists to wage battle on their behalf.
In a January article, ProPublica reported on how these “untested companies” have jockeyed for their share of this burgeoning market. Now these firms have set their sights on Texas, which is seen as something of a holy grail for school voucher proponents. If enacted, the state voucher program could well become the largest in the country.
“I hate to use that cliché of ‘Everything is bigger in Texas,’ but in this case, it actually is true,” Cowen said. “ It’s just much more volume, and if you could get only a small margin share of the Texas contract, [it could] still be your biggest account, just given the amount.”
ClassWallet currently has four lobbyists registered in Texas, state records show. The company already has a relationship with the state government: In 2020, the Texas Education Agency issued a non-competitive emergency contract for ClassWallet to administer TEA’s new Supplemental Special Education Services program providing stipends to students with disabilities using $30 million in federal pandemic relief money.
Odyssey, meanwhile, has secured one of the biggest hired guns available: Luis Saenz, who served as Abbott’s chief of staff for five years, ending in late 2022. The company first retained Saenz as a lobbyist in October 2023, when Abbott was making his last failed special-session push to pass vouchers, according to state records. He’s representing Odyssey again this session, and he could make between $50,000 to $100,000 doing so, according to state lobbying records. The company also hired Daniel Warner, previously a policy advisor to ex-House Speaker Dade Phelan, as its state director in Texas.
“We would welcome the opportunity to partner with the state of Texas to ensure that families across the state have access to the resources and flexibility necessary to meet their child’s needs,” Odyssey spokesperson Lauren Bender said in a statement to the Observer.
SIGN UP FOR TEXAS OBSERVER EMAILS
Before Joseph Connor started Odyssey in 2021, he had already made a career in school privatization as a lawyer, consultant, and founder of a “microschools” company. Connor helped with an amicus brief for a 2020 U.S. Supreme Court decision that ruled states could not discriminate against religious schools when providing public funds for private education.
Connor’s company, which recently got $10 million in backing from venture capitalists including Tusk Venture Partners and Andreessen Horowitz, currently has contracts to manage school voucher programs in Iowa, Louisiana, Georgia, and Wyoming. Over the last four years, the company has built a track record marred with complaints from parents and state officials.
In 2022, Odyssey won its first statewide contract, worth $1.5 million, in Idaho to administer that state’s voucher-like program. As Idaho Education News reported, Odyssey agreed to pay back $180,000 after the State Board of Education found some purchases approved by the contractor were ineligible under the program. The state has also ordered Odyssey to pay back interest it had earned by holding program funds in a bank account. In Iowa, the state auditor found that the company’s contract increased beyond its initial cost to account for transaction fees. Odyssey has also racked up complaints about overpriced school supplies as part of a contract with the State of Missouri.
ClassWallet hasn’t avoided controversy either. In 2022, Oklahoma Watch reported that the state waived its competitive bidding requirements to award the company a $650,000 contract to disburse $18 million in federal relief money through a state education grant program called “Bridge the Gap.” Parents then used the funds for non-education-related purchases, and the federal Department of Education ultimately determined that Oklahoma should return at least $650,000 in federal funds. ClassWallet pinned the blame on the state for not establishing any guardrails for the program. Last January, Oklahoma’s governor initiated a lawsuit against ClassWallet for the company’s role in the program, but the state’s own attorney general stopped the suit.
ClassWallet did not respond to the Observer’s request for comment on its interest in running the voucher program in Texas.
Senator Creighton mentioned ClassWallet by name on the Senate floor as he discussed the change to disallow transaction fees. “Let’s say it’s ClassWallet to handle the transactions. They don’t need to be double dipping,” Creighton said. “That needs to be a fee that’s arranged and set.”
As of Monday, the Senate and House voucher proposals differ in their regular cost reporting requirements for CEAOs, and both require that any interest earned on program funds must be returned to the state.
Meanwhile, inflation and unfunded legislative mandates, along with shrinking school tax revenues and no increase in state education funding for the past six years, have left public schools in dire financial straits. A potential 5 percent loss of students who leave public schools for private schools under a school voucher program would result in another $2.25 billion loss to schools statewide, as estimated by the liberal policy organization Every Texan, which could jeopardize neighborhood public schools across the Lone Star State.
Editor’s Note: This story has been updated to reflect a fiscal note released Tuesday morning. The description of the Iowa State Auditor’s findings has also been changed.
(Except for the headline, this story has not been edited by PostX News and is published from a syndicated feed.)
