Business Goes to School

The For-Profit Corporate Drive to Run Public Schools

by Barbara Miner

Multinational Monitor, January / February 2002

"Good Morning America" was broadcast from South Pointe Elementary School in Dade County, Florida. The news peg was the first day of school at what was to be a new and glorious era in education: for-profit, private companies running public schools.

South Pointe was run by the for-profit Education Alternatives, Inc. (EAI), the first for-profit private firm under contract to run a public school and, at the time, a darling of the movement to privatize schools.

John Golle, head of EAI, boasted that his company could run public schools for the same amount of money, improve achievement and still make a profit. "There's so much fat in the schools that even a blind man without his cane would find the way," he told Forbes magazine in 1992.

EAI's rhetoric never matched the educational and financial reality, however. EAI soon found it couldn't run public schools for less than the districts it contracted with, and its promises of academic improvement proved elusive.

By the spring of 2000, EAI was in the midst of a corporate and educational meltdown. The company, which changed its name to Tesseract Group Inc., was millions in debt, got kicked off the Nasdaq when its stock price tumbled to pennies a share, and couldn't even afford the postage to mail report cards home to parents at one of its remaining charter schools in Arizona. Today, the company is in bankruptcy.

EAI's experience notwithstanding, other private contractors are lining up to run public schools, claiming they can improve educational performance while turning a profit.

INTRODUCING THE EMO'S

For decades, public schools have purchased any number of products and services from private companies-whether textbook companies or bus companies providing transportation. But in the last decade, privatization took on a new meaning, as for-profit companies hoped to get involved in education at a higher and qualitatively different level. Their goal: to run schools or entire school districts-from the hiring of teachers to the development of curricula and the teaching of students. In the process, they plan to compete with publicly run schools and redefine the very definition of public education.

(The growth of for-profit companies running public schools is an essential but not exclusive component in the education privatization movement. Another aspect is the funneling of public dollars directly to private schools, including religious schools, through taxpayer-supported vouchers. The future of that privatization effort now depends on the U.S. Supreme Court, which will hear oral arguments this February in Zelman v. Simmons-Harris on whether a Cleveland voucher program violates the separation of church and state; a ruling is expected in early summer. )

The Wall Street term for private companies that wish to manage public schools is Educational Management Organizations (EMOs.) Proponents of privatization say that if you like HMOs, as many on Wall Street do, you'll love EMOs. The industry's backers are fond of comparing public education to the healthcare industry of 25 years ago, before the nationwide ascendancy of HMOs.

"Education today, like healthcare 30 years ago, is a vast, highly localized industry ripe for change," Mary Tanner, managing director of Lehman Brothers, told a 1996 Education Industry Conference in New York City. "The emergence of HMOs and hospital management companies created enormous opportunities for investors. We believe the same pattern will occur in education."

In the last year, for-profit school management companies in the United States have consolidated themselves into a number of key players, including:

* Edison Schools, Inc., based in New York City. Formed in 1992, Edison is by far the biggest and most important player in the field. It currently runs 136 schools serving 75,000 students in 22 states and the District of Columbia. In July, Edison acquired LearnNow, a privately held company. Edison is the only publicly held company among the major for-profit education management companies. Key investors have included Microsoft co-founder Paul Allen ($71 million through his Vulcan Ventures in 1999), J.P. Morgan Chase & Co., and Investor AB, a Swedish holding company.

* Chancellor Beacon Academies, formed by the merger in January 2002 of Beacon Education Management of Westborough, Massachusetts and Miami-based Chancellor Academies, Inc. The new company, the second largest for profit school management company in the United States, serves about 19,000 students on 46 campuses in eight states and the District of Columbia.

* Mosaica Education Inc., of San Rafael, California. Mosaica is running 22 schools this year in 11 states; in June it took over the struggling Advantage Schools Inc.

* National Heritage Academies, Grand Rapids, Michigan. National Heritage, with 28 schools in 2001-2002, operates mostly in Michigan and North Carolina. It emphasizes moral values and character education in a setting that opponents claim is thinly veiled religious education.

Many investors speak bullishly of Edison and the other for-profit school management companies, extolling the ability of the marketplace to unleash creativity and innovation. Others are more cautious. The big unknown question is whether for-profit companies will prove they can make money in the K-12 education market, which has an estimated potential value of $350 billion.

Even industry leader Edison has been forced to bluntly acknowledge its unprofitability. In filings with the Securities and Exchange Commission, Edison has repeatedly noted, "We have not yet demonstrated that public schools can be profitably managed by private companies and we are not certain when we will become profitable, if at all."

Fundamentally, privatization is about money, not educational reform. Indeed, the various reforms touted by for profit companies-a longer school day and school year, intensive teacher training and reliance on technology-are reforms advocated by many public school educators.

Edison notes in its press materials that its school design "is the product of the thought, discussion, observations and ideas of educators from all walks of school life"-using the kind of vague, idealistic language for which public schools are often criticized.

So far, say Edison's critics, it has not delivered the goods. "Edison has promised 'innovative curricula' that would revolutionize education," says Gerald Bracey, an education researcher and author of The War Against America's Public Schools: Privatizing Schools, Commercializing Education. "But, discovering that curricula cannot be developed easily, it had to fall back on existing curricula developed by orthodox educators. Edison students spend almost 50 percent more time in class each year than regular public school students and Edison emphasizes testing. Yet Edison students do not [perform] better than regular public education students. Edison vowed its schools could cost no more than regular public schools, but this promise, too, has been broken."

In several high-profile districts, Edison has been plagued by controversy and faces mounting opposition. For example:

* In New York City, the company last spring lost a community/parental vote on whether the company should manage five New York schools. The vote was doubly embarrassing because it came in a city where Edison is headquartered, and because it was the parents who rejected Edison. (This is the only instance where Edison's future has been decided by the votes of parents, not politicians.)

* In Wichita, Kansas, the school board is debating whether to end its contracts with four Edison schools in the district, which each cost $250,000 more than comparable district schools. Strong sentiment for canceling the contract exists in at least two of the schools. At one school, Ingalls-Edison, enrollment dropped from a high of 722 in 1997 to 426 this year, while more than half of the teaching staff left after the end of the last school year. Edison says the teachers left because they did not like the company's longer school year. But a number of the teachers say they were driven out by intolerable working conditions, with one teacher telling the Wichita Eagle, "The work environment was horrifically hostile. I never knew where I stood." In addition, the school's principal and assistant principal were removed this December after it was found that school personnel improperly helped students on standardized tests.

* In Dallas, the school board forced Edison to renegotiate its five-year contract when it was found that Edison would have otherwise received $20 million more than the actual cost of running its seven schools.

* In San Francisco, parents and school board members revoked Edison's charter when test scores showed that the school's performance was the absolute worst among the city's schools. Under political pressure, the state was forced to step in and grant Edison an independent charter so the school could keep going. The San Francisco battle also highlighted issues of whether Edison has genuine parental support, after it hired a professional organizing and marketing company, Digital Campaigns, to generate support among parents. Digital Campaigns, for example, boasted on its website that Edison was able to attract only five parents' signatures on a petition until Digital Campaigns stepped in to help. Caroline Grannan, a San Francisco public school parent and co-founder of Parents Advocating School Accountability, says, "It's impossible to know how many 'happy parents' would be speaking up without the professional organizing operation."

* In Philadelphia, Edison is attempting to secure a six-year $101 million consulting contract and a separate deal to run as many as 45 of the district's schools. The company has the backing of Governor Mark Schweiker, a Republican who pushed through a plan this December to allow the state's takeover of the district. But Edison has run into stiff and ongoing community resistance.

"What has turned many in the community against Edison is not only that the company's sweeping claims of success do not stand up to scrutiny," notes Paul Socolar, editor of the grassroots publication Philadelphia Public School Notebook, "but also that Edison intends to extract a large profit from a school district that is already profoundly underfunded."

Overall, the district plans to turn as many as 60 of its 264 schools over to for-profit management. Chancellor Beacon Academies, has also announced that it will seek out contracts in Philadelphia.

BELOW AVERAGE

One of the biggest controversies in all of the districts where it operates involves whether Edison's schools actually perform better than public schools. Edison says yes, but the company's performance indicates otherwise. And not just in San Francisco, where test scores were so low.

Dallas Superintendent Mike Moses told The American School Board Journal this December that "we looked at their seven schools against seven comparable schools, and truthfully, Edison's performance was not superior."

A recent study conducted for the National Education Association by Western Michigan University researcher Gary Miron found that Edison schools are performing the same as or slightly worse overall than comparable public schools. U.S. Representative Chaka Fattah, D-Pennsylvania, reviewed Edison's claims of improved achievement this fall and found that "the overwhelming majority of Edison schools perform poorly and in many cases are faring worse than some Philadelphia schools."

Edison disputes such reports as political sniping, but has yet to definitively refute them. The RAND Corporation, an independent research group, has been hired by Edison to analyze the company's academic achievement, but that report will not be completed until 2003 or 2004.

Fundamentally, however, the main complaints against Edison are two fold. First, say critics, in an era of strapped public school budgets, money should not be siphoned from education in order to provide shareholder profits. Second, say privatization opponents, public education should serve and be run by the public, especially teachers and parents, while for-profit companies are controlled by shareholders and private investors whose main aim is making money and whose decisions are not subject to public oversight. (Edison did not respond to requests for comment for this article.)

Given such concerns, one might ask why a school district would contract with for-profit companies.

At least in part the answer lies in the intensive lobbying and political connections of privatization advocates.

Another part of the answer lies in the belief that there are quick fixes that will improve schools, especially in underfunded urban districts. School districts are sometimes open to privatization because officials are tired of fighting taxpayers and state legislators for the increased money they know is essential to get the job done and are equally tired of being blamed for failures they believe are beyond their control.

"ln spite of their drawbacks, privatization schemes will likely continue to attract urban school districts facing chronic underfunding and a dramatic increase in the number of desperately poor children with exceptional educational needs," says Alex Molnar, a professor at Arizona State University and author of Giving Kids the Business: The Commercialization of America's Schools. "So many of the variables that might help these children succeed seem outside of the school district's control that it is, no doubt, tempting to hand the burden of being 'accountable' to someone else."

BACK TO BUSINESS ABC'S

Ultimately, the for-profit industry's future depends at least as much on its ability to generate profits as on its educational record. So far, even that record is dismal. Most of the companies making money off of education have done so by focusing on a specific niche-such as selling reading programs, computer software or tutoring and test-prep programs. No educational management company has shown an ongoing ability to make money.

That's one reason all eyes are on Edison. "If Edison makes it, it will open the floodgates," Jack Clegg, CEO of Nobel Learning Communities Inc., told Business Week this past July.

So far, however, Edison has been bleeding red ink. Some of the most dismal summaries come from its own reports to the SEC. In a report filed on November 14, Edison noted that since the company's inception, it has lost more than $233.5 million. Nor are the balance sheets dramatically improving. In the quarter ending in September, it lost more than $18 million.

"We have incurred substantial net losses in every fiscal period since we began operations and expect losses to continue into the future," Edison admitted in the SEC filing.

For years, Edison has projected profits in the near future -not so soon as to get caught empty-handed, but soon enough to calm potentially worried investors. But the target date for profitability keeps receding into the future.

As early as May 1996, Edison Chair of the Board Benno Schmidt said it would be about three years before the company would likely make a profit. In June 1997, Schmidt and Edison founder Chris Whittle reaffirmed Edison could be profitable in about two years when the company would have 50 to 70 schools. But by July 2001, Whittle seemed to beg off any expectations by projecting that Edison would begin to turn a profit only in 2005, when the company expects to have 250,000 pupils.

THE PRIVATIZATION CALCULUS

Edison faces its biggest test in Philadelphia, where it hopes to get a multimillion-dollar contract to run as many as 45 schools. In the short term, such a contract would keep enough cash flowing in to satisfy investors and keep stock prices from plummeting. (Edison went public in November 1999 at a starting price of about $18 a share. At the beginning of 2002, its stock was basically flat, selling between $17 and $19 a share.)

Even if it gets what it wants out of Philadelphia, in the long run the problems facing Edison are the same that forced Tesseract/EAI into bankruptcy. Despite perceptions, there is little "fat" in urban public school budgets. Nor are there any "silver bullets" that will magically improve schools.

Because education is a labor-intensive industry, there are only two ways to make money: cut wages or cut services. (A variation on "cut wages" is hiring younger, lower-paid staff. A variation on "cut services" is controlling student admissions so that more-difficult-to-educate students are discouraged from applying. ) Like Tesseract, Edison has been plagued by charges that it saves money by hiring less-experienced teachers and that it does not adequately serve special education students.

And when Edison announced this fall that its plan for Philadelphia included cutting the costs of support staff, it was following a pattern established by EAI. When EAI went into its first multi-school contract in Baltimore in 1992, one of the first things it did was replace $10-an-hour, unionized paraprofessional workers with $7-an-hour "interns" who did not receive benefits.

That doesn't mean, however, that some people didn't make a lot of money off of EAI. Likewise, some people are in line to make millions off of Edison.

EAI founder and CEO Golle, ever the shrewd business operator, knew when to make his move. In the fall of 1993, over a two-month period when EAI's stock was riding high, Golle took advantage of stock options to make a net gain of approximately $1.75 million on sales of 50,000 shares of EAI common stock.

Edison founder Chris Whittle may also have been smart enough to get some of his money out while the getting was good. On one day last March, some 650,000 shares held indirectly by Whittle were sold for more than $15 million. According to a proxy statement filed this fall, Whittle still owns 3.7 million shares of Edison's publicly-traded stock, and he and his associates have options on an additional 4.4 million shares.

More important than Golle and Whittle are investors who continue to be optimistic about their ability to extract enormous profits from the under-funded public schools. The for-profit education privatization movement is not likely to go away just because the companies are not yet making profits. A lot of people with a lot of money are in this for the long run.

Barbara Miner is managing editor of Rethinking Schools, an education reform journal based in Milwaukee, Wisconsin.

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