For-Profits Target Education

In September 1990, “Good Morning America” was broadcast from South Pointe Elementary School in Dade County, Fla. The news peg? It was the first day of school in 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), which was the first for-profit private firm under contract to run a public school, and which at the time was the darling of the privatization movement.

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 its 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 has changed its name to Tesseract Group Inc., was millions in debt, kicked off 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.

The tale of EAI is more than historical anecdote, however. It provides interesting parallels to the problems facing one of the hottest trends in education: the move by for-profit companies to run public schools. P>The biggest controversy currently centers on Philadelphia, where the for-profit Edison Schools is attempting to secure a six-year, $101 million consulting contract and a separate deal to run as many as 45 of the 60 district schools due to be privatized as “partnership schools.” Edison has the backing of Gov. Mark Schweiker, a Republican, who pushed through a plan this December to allow the state’s takeover of the district. But it 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 Philadelphia Public School Notebook, “but also that Edison intends to extract a large profit from a school district that is already profoundly underfunded.”

Overall, more than 22 businesses, groups and institutions have applied to run one or more of the 60 “partnership schools.” For profit contenders include Chancellor Beacon Academies of Miami, Charter Schools USA of Fort Lauderdale, FL., and Mosaica Education Inc. of San Rafael, CA. A variety of non-profit groups such as Temple University are also seeking to run partnership schools.

What is Privatization?

Privatization, while couched in rhetoric extolling the ability of the marketplace to unleash creativity and innovation, at heart is a way for for-profit companies to get their hands on a bigger share of the $350 billion K-12 education industry. On Wall Street, privatization has one single focus: can for-profit education management companies make a profit?

The verdict is decidedly still out on that matter. While some privately held companies report profits, there is not a single for-profit, publicly held educational management company that has shown an ongoing ability to make money. Edison, the biggest and most important for-profit firm, has lost more than $233.5 million in the last decade (see article page 17).

Yet the controversy goes beyond whether private companies can eke out profits from already underfunded school districts. Privatization inherently leads to private control; it undercuts democratic oversight and decision-making of what is a public institution – and turns such control over to private forces focused on making money, not on doing what is in the best interests of children and society at large.

Private sector involvement in public education is not a new phenomenon. 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 entire schools or entire districts – from the hiring of teachers to the development of curriculum to the teaching of students. In the process, they plan to “compete” with publicly run schools and redefine the very definition of public education – transforming it from a public service into a source of private profit.

The Wall Street term for such companies is Educational Management Organizations (EMOS.) And if you like HMOs, as many on Wall Street do, you’ll love EMOs. Investors, in fact, are fond of comparing public education to the healthcare industry of 25 years ago, before the nationwide ascendancy of HMOs.

“Education today, like health care 30 years ago, is a vast, highly localized industry ripe for change,” Mary Tanner, managing director of Lehman Brothers, said, at 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, there has been a consolidation within the for-profit school management companies, reducing the number of key players. Those remaining:

• Edison Schools Inc. Formed in 1992 and based in New York City, 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, in an example of the industry consolidation, Edison acquired the privately held LearnNow. Edison is the only publicly held company among the major for-profit education management companies. Key investors have included Microsoft founder Paul Allen ($71 million through his Vulcan Ventures in 1999), J.P. Morgan Chase & Co., and Investor AB, a Swedish holding company.Contracts representing more than 30 percent of Edison’s revenue will expire by the end of the 2002-2003 school year, which is one reason the Philadelphia deal is crucial to Edison. In the short term, such a contract would bolster the stockholder confidence needed to keep stock prices from plummeting. (Edison went public in November 1999 at a starting price of about $18 a share. In the beginning of 2002, its stock was basically flat, selling between $17 and $19 a share, and in mid-February it was down to about $14 a share.)
• 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, CA. 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, MI. 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. Michigan industrialist J.C. Huizenga, who has invested more than $50 million in National Heritage Academics, characterized for-profit education this way to Business Week last year, “This is a breakthrough business opportunity.”

Others are more cautious. Allen Greenberg, editor of the Philadelphia Business Journal, wrote this fall, “I took at look at some of Edison’s recent filings with the Securities and Exchange Commission. It’s not a pretty picture.” His bottom-line analysis: that Edison’s financials “should give even the most ardent supporters of privatization cause to go slow.”

Even Edison has been forced to bluntly acknowledge its unprofitability. In filings with the Securities and Exchange Commission (SEC), 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.”

TOUGH SLEDDING FOR EDISON

In several high-profile districts, it has not been a good year for Edison’s image. For example:

• In New York City, last spring, the company 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, KS, the school board voted unanimously on Jan. 28 to take back two of Edison’s four schools in the district- Edison-Ingalls and Edison-Isely elementary. At Ingalls, 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. At Isely, enrollment dropped from about 280 to 200.

Edison says the teachers left because they did not like the company’s longer school year. But a number of teachers from Ingalls told The Wichita Eagle that they were driven out by intolerable working conditions. “The work environment was horrifically hostile,” said teacher Jeanette Falley.

In addition, the school’s principal and assistant principal were removed last 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 stepped in and granted 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 parent 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 Ôhappy parents’ would be speaking up without the professional organizing operation.”

BETTER TEST SCORES

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.

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.”

Bracey, author of The War Against America’s Public Schools, issued a report in early February on Edison’s claims of improved academic achievement, and said that Edison makes “hyperbolic conclusions, using data that can only be described as questionable.”

A recent study of 10 Edison schools by the National Education Association, done by the Evaluation Center at Western Michigan University researcher Gary Miron, found that Edison schools are performing the same as or slightly worse overall than comparable public schools. “Our findings suggest that Edison students do not perform as well as Edison claims in its annual reports,” the report said. An earlier report by the American Federation of Teachers reached similar conclusions.

U.S. Rep. Chaka Fattah (D-PA) 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 fairing worst than some Philadelphia schools.”

Edison disputes such reports as political sniping. The RAND Corp., a respected independent research group, has been hired by Edison to analyze the company’s academic achievement, but the report will not be completed until 2003 or 2004.

WHY TURN TO PRIVATIZATION

Given the concerns around privatization, why would a school district contract with a for-profit company?

At least in part, the answer lies in the intensive lobbying and political connections of privatization advocates. While there may be doubts about the educational value of privatization, the movement has the support of well-heeled investors with strong ties to political powerbrokers.

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.

Finally, the power of the school privatization movement cannot be separated from the growing clout of market ideology not only in the United States but around the world. As “globalization” becomes not just a market strategy but an increasingly dominant world view, the very concept of institutions designed to serve the public good rather than generate money for stockholders is seen as hopelessly idealistic and anachronistic.

WHO WINS, WHO LOSES?

Ultimately, for-profit firms will not live or die on their educational record but on their ability to generate profits. And so far, that record is dismal. In the long run, the problem facing Edison is the same that faced the now bankrupt Tesseract, formerly known as EAI. 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.) Like Tesseract, Edison has been plagued by charges that it saves money by hiring less-experienced teachers and that it doesn’t 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 multischool 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 have 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.

For example, EAI founder and CEO Golle, ever the shrewd businessman, knew when to make his move. In the fall of 1993, over a two-month period when EAI 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 has likewise been smart enough to play the stock option game. In one day alone 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 of Edison’s publicly traded stock.

To cite a few other examples. Schmidt made more than $400,000 in Edison stock sales in 2001, on top of his six-figure salary. Christopher Cerf, Chief Operating Officer for Edison, made $880,000 in Edison stock sales in 2001, while Jeffrey Leeds, a director in Edison, made more then $2 million off Edison stock sales last year. On June 12, Vice-President Deborah McGriff, (wife of voucher and privatization proponent Howard Fuller) sold 15,325 shares of the roughly 200,000 stock options she held when the company first went public – for a gain of $348,184.

But, as Enron demonstrates, lots of questionable companies can win influential friends. 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.

Nonetheless, advocates of improved schools shouldn’t be fooled that privatization is somehow about education reform. In the end, power and money – who gets more and who gets less – remains at the heart of the privatization struggle. Educational improvement is a sideshow.