Edison's Failing Grade

Investors and school districts are ditching the country's leading public education privatizer

A year ago, Edison Schools Inc. was flying high. With 133 schools under its control, Edison had quickly become the nation's largest for-profit manager of public schools. And the public education funding that the company was tapping into seemed to provide a potentially limitless revenue stream. Founder Chris Whittle had predicted that, by 2020, Edison would run one in ten public schools in the United States. The company was a hit with Wall Street: shares were trading at $38, up from $18 when Edison went public just over two years earlier.

Now shares of Edison are changing hands for about a dollar, the minimum price required to stay listed on NASDAQ. Edison has racked up $250 million in losses since it began. The company announced June 3 that it had secured the $40 million investment it needs to open school in the fall. But the futures of 74,000 kids in Edison schools from Maryland to California remain tied to a company that is financially unstable. Edison's economic troubles raise renewed questions about the wisdom of turning public schools over to for-profit corporations -- and could pose a major setback for the school privatization movement.

Edison is still reeling from a three-month inquiry into the company's finances by the Securities and Exchange Commission. Investigators determined that the company consistently misreported revenues, providing an unduly rosy picture to investors. For example, Edison reported $375.8 million in revenue in fiscal 2001. According to the SEC's May 14 order, $154 million of that never passed through the company: it was spent by school districts on salaries for teachers and other staff at schools run by Edison. The SEC also found that Edison does not have an adequate system of internal accounting controls in place.

At least ten class action lawsuits have since been filed against the company, one of them by Milberg Weiss, the firm handling a major stockholder suit against Enron. All charge that the company misled investors. Yet amidst this turmoil, the former golden child of for-profit education is planning its biggest project to date: next fall's takeover of 20 low-performing schools in Philadelphia.

Edison's improper bookkeeping practices may come back to haunt the company, as was the case with Enron. But there's more to the Edison story than an accounting scandal. Edison was built on the premise that a private company could run public schools more effectively and efficiently than local government could. Judging from the company's recent track record, that premise may soon be proven false.

Bruce Fuller, a professor of education and public policy at UC Berkeley who has researched charter schools and is familiar with Edison's history, says that Edison's stock performance isn't unconnected to the company's classroom record. "I think the softness of the stock price is related to the softness of their test scores and educational results," he says. "Another way of looking at it is, if they were doing better on the ground and getting more contracts, they wouldn't have to obfuscate their numbers. Even markets have rules -- and [Edison's] evidence is so mixed that it's starting to affect their standing with investors."

The Edison Design

H. Christopher Whittle is probably best known for reviving Esquire magazine in the 1980s, but he made his impression on the education world with Channel One. That controversial company placed television sets in schools across the country, on the condition that students watch specially produced news show each day -- complete with demographically targeted advertisements.

After Whittle shut down Channel One, he considered launching a for-profit chain of private schools. But that plan would have required a huge capital investment to construct new school buildings. So Whittle turned his attention to public education -- and the dollars that fund it. The Edison Project, as it was originally called, essentially argued that it could run public schools more successfully than public agencies -- and turn a profit.

The fact that so many people signed on to this experiment shows just how low the public's trust in traditional government-sponsored education had fallen. After decades of sinking money into failing schools, people were primed for something new.

Whittler's proposal was this: Edison would enter into an agreement with a school district under which the company would take over the operation of a school. The district would give Edison all the money typically spent to run that school. From that money, Edison would pay the school's operating expenses (and, in some cases, teacher salaries); any money left over would go into company's coffers.

Edison executives argued they could teach kids more effectively by extending the school day and year, and by implementing the "Edison Design" -- a standardized curriculum paired with rigidly structured classroom time. They also made much of the increasing proportion of school budgets going to administrative costs. The company, they said, could replace bloated school-district bureaucracies with the streamlined efficiency of the private sector and the economies of scale that would come with a nationwide public-school chain.

Skeptics said there were only two ways Edison could turn a profit: cut educational corners or milk school districts for more money. They predicted that Edison would hire less experienced, and therefore cheaper, teachers. They worried that the company would force a single pre-packaged academic program on all its schools without accounting for differences between communities or students. And they cautioned that a company bent on expansion would likely be fixated on test scores -- and would do basically anything to ensure that they increased. They warned that a for-profit venture would be less accountable, and with plenty of money to spend up front, might lure districts into agreements that would prove untenable or even harmful. And Edison's six-year history of running schools provides ample evidence that many of the concerns were warranted.

Messing with Texas

Cities like New York and Austin have resisted Edison's overtures from the get-go. Another half dozen have ended contracts with the firm -- often contentiously. But until the stock dive and the SEC inquiry focused more attention on Edison this spring, the company's dubious record in some communities attracted little notice.

One of Edison's first ventures was the 1995 takeover of Washington Elementary in Sherman, Texas; the next year it partly took over a neighboring junior high. As enrollment increased, the company cut teaching and staff jobs at both schools. Administrators let Edison's contract expire in 1999, saying they ended up paying the firm up to $1 million a year more than they had anticipated, thanks to hidden costs in the contract. Edison didn't even make a pitch to extend the relationship, which Whittle described as "unworkable."

Hidden costs were also an issue in San Francisco, where the school board yanked the charter that allowed Edison to run an elementary school in June 2001. The school had suffered incessant teacher turnover -- almost half of the teachers who taught there during its first year quit in the spring, the next year it was over half. Many criticized the regimented curriculum and heavy emphasis on test preparation. Teachers also objected to the fact that they were working much longer hours than their counterparts at San Francisco's other public schools.

A district investigation also found evidence that the school had a habit of "counseling out" students with academic or behavioral difficulties, which is in-line with complaints elsewhere that Edison schools weeded out students who were unlikely to perform well on standardized tests. The San Francisco school was also not providing the bilingual and special education programs required by the charter, the district report said. The California Board of Education, which is generally more supportive of the for-profit model, granted the company a quick replacement charter, and Edison has continued to run the school anyway -- but more teachers have left, and test scores have sunk so far that the school is ranked last of all San Francisco's 75 elementary schools.

This spring, complaints at a number of school districts where the company does business have raised more questions about the company. On May 14, the Chester Upland school district in Pennsylvania released a report highlighting high suspension rates at schools run by Edison. Two days later, Boston Renaissance Charter School, one of the first Edison-run schools, announced that it would pull out of its $9 million-a-year contract with the company three years early. The school, one of Edison's largest, had posted test scores below city averages. The same day, administrators at the Clark County, Nev., district said they would freeze payment on $3 million now owed to Edison. Edison had pledged it would round up $4 million in philanthropic support for the Nevada schools during this school year. So far it has delivered just $1.8 million.

In Dallas, where Edison runs seven schools, two slipped from "acceptable" to "low performing" on state tests this year, prompting the district to begin a probe of the contract. District officials in Inkster, Michigan, where Edison educates all 1,500 students, have been in a months-long battle with the company over information, one that has set the stage for a state takeover. And school officials in Hamden, Connecticut have indicated they won't renew Edison's 5-year contract there, saying that Edison's contributions to the school had declined over time.

All of this controversy may very likely come to a head in Philadelphia, where Edison is positioned to play a major role in a state-guided initiative to reform the city's schools. Last August, then-governor Tom Ridge hired Edison for $2.7 million to do a review of the Philadelphia schools and come up with a reform plan. In October Edison recommended, unsurprisingly, that the state hire a private company to run district offices and 45 of the city's lowest-performing schools (the company also targeted thousands of support jobs, including janitorial services, for budget cuts). In December, the mayor and governor placed the school district in the hands of a five-member reform commission. After months of debate and public protests, the commission announced on April 17 that 42 schools would be handed over to private managers -- 20 of them to Edison. (Though it would be Edison's largest single contract, Wall Street had been banking on a bigger one, and the stock began to fall.)

"The whole process has been bulldozed," says Craig Robbins, an organizer with Pennsylvania chapter of the Association of Community Organizations for Reform Now, the same group that stopped an Edison proposal in New York City last year. "I think we've made a decision that we can't stop this train. But there will be a hell of a campaign waged about how this happens. We want to make sure there's a quality teacher in each classroom and that there are enough textbooks."

Edison typically spends between about $1 million to open a single school. And on May 18, company executives admitted they didn't have enough cash on hand to meet the 20-school obligation -- and were trying to round up $30 -50 million from investors. In the past Edison has covered its heavy annual losses and high overhead by selling more stock, but with stock so low, that wasn't likely to scare up much money.

"Every single year Edison has been in existence, we've needed to raise money," Edison spokesperson Tucker said. "We're not pleased our stock price is the lowest it's ever been -- but Edison remains incredibly viable. Businesses do not go bankrupt because of stock prices."

Edison announced June 3 that Chelsey Capital and Merrill Lynch had agreed to ante up $40 million -- and the stock quickly shot up, closing at $1.60. But the terms of the deal aren't favorable to Edison, which has agreed to pay sky-high interest on the loans.

The Future of For-Profit

For-profit management of public schools is such a new phenomenon that it's hard to ascertain what will happen to the schools Edison runs in the event that the company goes under. Tucker says that, if the firm does declare bankruptcy, it will need to negotiate with every school, "because every contract is different."

"Will creditors come haul away all the computers? Pick the rug up off the floor and take materials off the walls?" Margaret Brodkin, the unofficial spokesperson for San Francisco's anti-Edison contingent, asks. "It's hard for me to believe it might come to that, but this whole thing has been hard for me to believe."

Brodkin is one of the San Francisco activists urging the California Board of Education to return the Edison school to the district before fall comes because of Edison's shaky finances. But San Francisco isn't the only place questioning the wisdom of working with such an unstable enterprise. In Flint, Michigan, school board members are publicly calling for a reevaluation of the relationship and other communities are starting to strategize as well.

If Edison fails, it will not be the first school privatizer to go belly up. Education Alternatives Inc., had little success running urban schools in places like Hartford, CT, and also stirred up controversy over how it reported revenues. The company was reconfigured as the Tesseract Group, but ended up filing for bankruptcy in January 2001. Gerald Bracey, author of The War Against American's Public Schools: Privatizing Schools, Commercializing Education, says the experience of these companies may indicate that their business model is based on a faulty premise.

"A number of people have been arguing that there was a lot of money being wasted in education, a lot of fat that could be trimmed. I think they've found that's not true."

But Tucker maintains that it is too early to write Edison's obituary. "When we didn't get five schools in New York last year, everyone said it would be a defeat for the company. Now, we win 20 schools in Philadelphia, and people are saying sort of the same thing," he said. "All the folks who are saying 'Let's start planning, they're going to shut down' -- I think they're getting a little ahead of themselves."

Caroline Grannan has two kids in San Francisco public schools. Edison's record has prompted her to set up a web site, www.pasasf.org, and devote hundreds of hours to tracking the company's activities. But she takes little joy from Edison's meltdown. "Yeah, the house of cards is falling," she says. "But it's a real disruption to the kids and families, and to a lot of teachers."

School districts such as San Francisco's, which saw Edison as a panacea, may end up worse off for having played the privatization game. If Edison goes under, the district be faced with huge logistical challenges: re-enrolling kids, renegotiating contracts with teachers who were working at Edison schools, maybe even dealing with the company's creditors. And all the money the district paid to Whittle and company will have been spent in vain. "It's been a distraction from focusing on ways and pursuing new methods for educating urban public school kids," Gannon said. "Instead, we've had people flitting after this little con game."

"I always thought this was a dead-end detour in our efforts to reform education," says children's advocate Brodkin. "But it's happened so quickly -- even those of us who were opposed didn't appreciate how corrupting the profit motive could be."

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