Jan/Feb 2002 - VOLUME 23 - NUMBER 1 & 2
P r i v a t i z a t i o n : R i p - O f f s a n d R e s i s t a n c e
Business Goes to School
By Barbara Miner
The For-Profit Corporate Drive
to Run Public Schools
In September 1990, ABCs 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.
Theres so much fat in the schools that even a blind man without
his cane would find the way, he told Forbes magazine in 1992.
EAIs rhetoric never matched the educational and financial reality,
however. EAI soon found it couldnt run public schools for less than
the districts it contracted with, and its promises of academic improvement
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 couldnt 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.
EAIs experience notwithstanding, other private contractors are
lining up to run public schools, claiming they can improve educational
performance while turning a profit.
Introducing The Emos
(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, youll
love EMOs. The industrys backers are fond of comparing public education
to the healthcare industry of 25 years ago, before the nationwide ascendancy
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:
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
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.
Reading The Bottom Line
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 Edisons 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 Americas 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:
What has turned many in the community against Edison is not only
that the companys 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
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.
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 Edisons
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 companys 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
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.
In 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 Americas Schools. So many of the variables that might help
these children succeed seem outside of the school districts control
that it is, no doubt, tempting to hand the burden of being accountable
to someone else.
Back To Business ABCs
Thats 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 companys 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
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
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 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
That doesnt mean, however, that some people didnt 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 EAIs
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
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 Edisons 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.