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September 1, 1994
Vol. 52
No. 1

Education for Profit: A Yellow Brick Road to Nowhere

Tainted by failure, rooted in myth, and marked by questionable practice, public-private partnerships in education carry more risk than many educators may realize.

For some observers with short memories, the current debate over the privatization of education began in the late 1980s, when Christopher Whittle invaded American classrooms with his commercial television news outlet, Channel One, and then laid the groundwork for the Edison Project, a grandiose scheme for a nationwide chain of for-profit schools. For others, the issue took hold in 1990, when Education Alternatives, Inc. (EAI) signed a contract to run a public elementary school in Dade County, Florida.
The field is now crowded with various contractors. Advocates describe public-private partnerships in education, such as those promoted by EAI and a recently scaled-back Edison Project (Reilly 1993), as bold new policy initiatives that will transform failed school systems by infusing them with competition and private sector know-how. Perhaps these advocates are ignorant of or choose to forget that during the late 1960s and early 1970s privatization was widely tried in public education. It was called “performance contracting.”

Wasteful Efforts

Then, as now, much of the educational performance contracting focused on schools attended by poor children. And then, as now, the argument was that the knowledge and efficiency of private companies competing for contracts would promote educational achievement in schools where it previously had been elusive.
Various studies of performance contracting, however, (Office of Economic Opportunity 1972, RAND Corporation 1972) found little evidence to support the enthusiastic claims of its proponents. Wohlferd (1972) concluded that commercial firms were no better at teaching children than public schools, private firms required as much or more money to do the job, and some companies used questionable methods to make a profit. As quickly as it had appeared, performance contracting disappeared as a serious educational policy alternative.
It was, however, destined to return during the 1980s, when “contracting out” had private contractors performing a wide range of governmental tasks in various agencies. The results? A 1992 study by Schneider found widespread waste of government money by private contractors.
Since privatization schemes are inevitably advanced in a deregulatory public policy environment and are promoted, at least in part, as cost-saving measures, it is not surprising that their proponents tend to omit one particular element—rigorous oversight. When the costs of oversight are added to the cost of a private contract, net savings are unlikely—in fact, there may be increased costs.

Faulty Rationales

Federal budget cuts and the ideological zeal for “market-based” public policy were only part of the dynamic pushing education policy toward privatization. Another important element was the widespread acceptance of what David Berliner (1993) refers to as myths that undermine the American people's confidence in public schools.
For example, conventional wisdom asserts that a decline in the mean scores on the Scholastic Aptitude Test (SAT) since 1965 proves that American educational standards have also declined. But Berliner points out that the decline occurred between 1965 and 1975. Scores between 1975 and 1990 were quite stable. Further, the decline that alarmed so many people amounts to about five fewer items answered correctly. Citing the large increase since the 1960s in the number of rural and minority students taking the SATs, particularly from schools in impoverished communities, Berliner finds cause for celebration.
The myth that the public education system is a bloated bureaucracy has also been proffered as a rationale for privatization. Yet, according to Berliner, “Central office professionals plus principals, assistant principals and supervisors in the public schools make up a mere 4.5 percent of the total employee population of the schools,” a smaller percentage than in many other industries. Berliner also argues that while Americans may pay more for higher education than any other nation, they certainly do not spend more on K—12 education. In 1988 dollars, the United States ranks ninth among 16 industrialized nations in per-pupil spending for grades K—12. That fact, coupled with the unequal distribution of K—12 funds in the United States, leads Berliner to conclude that the United States has “an amazingly high level of productivity for the comparatively low level of investment [it] makes.”
These arguments are corroborated by a recent report by the Organization for Economic Cooperation and Development (Celis 1993) and by a detailed analysis of educational statistics produced by Sandia National Laboratories (Carson et al. 1993). The Sandia report quotes Clark Kerr, President Emeritus of the University of California: “Seldom in the course of policymaking in the U.S. have so many firm convictions held by so many been based on so little convincing proof.”
Another factor propelling the latest privatization initiatives is the acceptance of a master myth—that money doesn't matter. This myth is typically used to rationalize gross inequalities in expenditures in various school districts and to bolster arguments against increasing educational spending. It has also helped produce the popular belief that the problems faced by poor (especially urban) school districts are not due to a lack of funds, but are primarily the result of the schools' inability to use the available money effectively.
The data that support this myth have appeared in a series of articles by Eric A. Hanushek published between 1981 and 1991. However, a subsequent reanalysis using more powerful analytic methods led Hedges, Laine, and Greenwald (1994) to conclude, ...the question of whether more resources are needed to produce real improvement in our nation's schools can no longer be ignored. Relying on the data most often used to deny that resources are related to achievement, we find that money does matter after all.
Despite its history of failure and the mythological nature of the assumptions that surround it, privatization continues to find support, no doubt for a variety of complicated reasons. Perhaps some urban school administrators feel trapped by their circumstances and see no other direction in which to move. They are confronted by a political environment in which the word public is still often equated with bad, in which money for the most basic physical plant maintenance is unavailable, and in which the public believes that the poor performance of schools is primarily the result of incompetence. Thus it's understandable that some urban school superintendents are attracted to this option.
Whatever the reasons, the belief that the problems of urban schools are intractable and that spending more money won't make any difference has led many to accept the idea that there is nothing to lose by “shaking things up” and trying privatization. Unfortunately, a careful assessment of the current situation, as exemplified by Educational Alternatives, Inc., and the Edison Project, suggests that privatization will, if anything, make matters worse.

Troubling Track Records

Anyone who has studied public education realizes that reform is a long-term process that requires commitment and sustained effort. It is clearly important to assess whether firms such as EAI and Whittle have the commitment or the resources for such an effort. Judging from their performance to date, the prospects are not good.
The venture that first brought EAI to public prominence was its five-year contract to run the South Pointe Elementary School in Dade County, Florida. By all accounts South Pointe is a good school, but it does not necessarily offer a good vantage from which to view EAI's prospects. The school was built to order for EAI, and the company was given a number of waivers concerning labor and purchasing regulations. EAI also pledged to raise $2.4 million from private sources to supplement the money that the district paid (Minor 1993). This hardly sounds like a “better results for the same money” proposition. Perhaps more unsettling is that as of January 1994, EAI had raised just half of the money it had promised (Jost 1994).
The company's financial situation has been troubling for a number of years. It lost close to $9 million from its founding in 1986 through the end of the 1992 fiscal year (Minor 1993). In June 1992, when EAI landed a five-year, $135-million contract to run nine schools in Baltimore, things began to look up. The company earned its first profit in fiscal year 1993 (Minor 1993). However, EAI's principal sources of income remained money from its stock offerings and interest earned on money from those stock offerings.
The value of EAI stock has fluctuated considerably—most recently downward (Marcial 1994). Further, EAI has been accused of issuing statements and using accounting methods “that paint an overly positive picture of its current and future financial position,” pushing stock prices to artificially high levels (Schmidt 1994). Neither EAI founder John Golle nor president David Bennett did much to counter their critics when each exercised stock options in 1993 that brought them huge profits— $460,000 for Bennett and $1,758,500 for Golle (The Minneapolis Star Tribune, October 25 and November 22, 1993). Adding to observers' concerns are reports that EAI must repay the City of Baltimore $338,500 it had received as a result of using inflated enrollment figures for the schools it manages (Rethinking Schools 1994).
Aside from such questions of impropriety, EAI is vulnerable to charges that it does not represent a cost-efficient alternative to the Baltimore Public Schools. Judson Porter, director of finance and procurement for the Baltimore schools, says: In the first year of the contract, the district paid EAI $23.3 million (after deducting overhead costs), yet it would have cost the district only $20.6 million to run the nine EAI schools itself (ASCD Update 1994). If, in fact, EAI schools cost more money, why not eliminate EAI and its profits and invest public money directly into the schools?
The Edison Project's finances are more difficult to sort out than EAI's, primarily because it is not subject to the same financial disclosure requirements that govern EAI, which is publicly traded. However, even a casual review of headlines over the past few years makes it clear that investors have already decided that the Edison Project is not financially viable (Fabrikant 1993). The single reliable source of income for Edison's sibling company, Whittle Communications, has been Channel One, the commercial classroom news channel. However, by 1994 Channel One had hit a fiscal wall. It was adding few schools to those already under contract, (see “Whither Whittle?”) and a number of advertisers were reconsidering their commitment to a project whose advertising rates they considered overpriced.

Whither Whittle?

Entrepreneur Christopher Whittle has been a prominent and controversial player in the debate over privatization of education. Here's a brief look at the evolution of Whittle's venture into the education arena.

  • 1988: Predicting that American teachers would have the best equipped classrooms in the world if educators accepted advertising-sponsored teaching tools, Whittle established Channel One. Despite challenges in state legislatures, he eventually induced schools all over the country to accept his televised news broadcasts, complete with commercials.

  • 1989: Whittle described his “vision” of a high-tech “new American school,” with computerized learning stations for each student, offices for every teacher, a year-round calendar, a longer school day to accommodate day-care services, and reduced pupil-teacher ratios—all without costing more than the current system.

  • 1990: Lamar Alexander took office as U.S. Secretary of Education, espousing views strikingly similar to Whittle's. Within this friendly political environment, Whittle established Whittle Schools and Laboratories, a private, for-profit company intended to be the corporate home for the Edison Project, a $60-million research and development effort that would create the blueprint for a new American school.

  • 1991: Whittle announced plans for a nationwide chain of innovative, for-profit schools to be built from the ground up and charging no more for tuition than the amount spent to educate children in public schools. He envisioned opening the first 200 campuses by fall of 1996 and foresaw an eventual enrollment of 2 million nationwide. He estimated that $2.5 billion would be needed to create the nationwide school system.

  • 1992: Whittle unveiled the Edison Project design team, which included conservative economist John Chubb, conservative education ideologue Chester Finn, and former managing editor of Newsweek Dominique Browning. Yale University President Benno Schmidt joined the team later in the year—at a reported salary of between $800,000 and $1,000,000.

  • 1993: Continuing reports of Whittle's financial difficulties, along with Alexander's departure as Secretary of Education, brought to the fore pessimistic views of the Edison Project's viability. Apart from his own money and the initial funds pledged by his partners, Whittle was unable to attract support for the Edison Project from a single outside investor. Retreating from his plan to establish a nationwide chain of schools by 1996, Whittle instead proposed joining the trend toward public-private partnerships in education through the management of failing public schools.

  • 1994: Whittle's financial difficulties were headline news in the business press. In August, Whittle tentatively agreed to sell Channel One for over $300 million to K-III Communications, a company controlled by a leveraged buy-out firm.

—Alex Molnar

The difficulty in assessing the financial status of the Edison Project should be a cause for alarm among policymakers and those responsible for administering public school funds. Joining a public school district with a private firm whose internal financial operations are concealed behind a “proprietary” curtain is an invitation to abuse. It is virtually impossible to uncover conflicts of interest, to assess the financial health of the company and its ability to discharge its obligations, or even to make sense of its claims of profit or loss in a particular district.
At this stage, it seems possible that if EAI and Whittle land a number of well-publicized contracts, they may be able to reassure investors and keep themselves afloat—at least in the short term. Their long-term prospects are much more doubtful. The only way for either company to maintain its profit margin and service its debt will be to engage in practices that are both educationally questionable and sure to be controversial. For example, according to Thomas Toch (1993), Whittle is considering locating doctors' and dentists' offices, as well as retailers of merchandise such as books, videos, and children's clothing, on Edison campuses. In addition, Channel One will air in all Edison Schools.
Because Edison has no contracts to run a school before autumn 1995 (in March 1994 it was granted charters by the State of Massachusetts to operate three new schools in Boston, Lowell, and Worcester [Jost 1994]), exactly how its methods of wringing profit from its operations will work in practice is unknown. EAI, however, does have a track record.

Questionable Cost-Savers

In 1991 EAI formed what it calls “The Alliance for Schools That Work” with KPMG Peat Marwick and Johnson Controls World Services, Inc. In essence, EAI functions as a general contractor with overall responsibility for the management of the contract and performance, as well as for all educational aspects of the contract. It subcontracts with KPMG Peat Marwick for financial services and with Johnson Controls for such noninstructional services as building maintenance. Edison has entered into a similar agreement with Bovis Management Systems Inc. to provide noneducational services.
Considerable attention has focused on the capital investments EAI made in Baltimore to clean up, repair, and modernize the school buildings it operates. However, comparatively little money can be saved by installing new windows and more efficient heating and cooling systems. Substantial cost reductions will have to come from labor. One way to reduce labor costs is to increase the number of students each teacher teaches, but both EAI and Edison claim they will reduce class size.
If class size is not increased, the only way to reduce labor costs is to lower the salary and benefits of support staff—secretaries, food service workers, and custodians, for example. This is exactly what EAI appears to have done in Baltimore. Johnson Controls does not reveal what it pays its custodians in the EAI schools in Baltimore because it considers the information proprietary. The rumor, however, is that custodians at EAI schools are currently paid substantially less than their counterparts at other Baltimore public schools. EAI has also replaced teacher aides with lower-paid “interns.” These cuts offer real cost reductions; however they carry a high social and educational price tag.
At a time when the hue and cry is for work, not welfare, and considerable concern exists over the condition of family life in impoverished urban neighborhoods, reducing the wages and benefits of school support workers is bad social policy. In many instances, these jobs represent an important source of income for the very families that provide stability in their communities and a decent home environment for their children. People of color often dominate such job classifications as teacher aide, custodian, and secretary (Farrell 1994). Does it make much sense to reform schools by pushing the parents of children who attend those schools into poverty? By signing a contract with EAI or Edison, a school district is in effect assuring a transfer of wealth from minority workers in its community to white investors somewhere else.

Educational Repercussions

Educationally, there is also a price to pay for efforts to cut labor costs. EAI's approach to reducing class size is unclear. At times it has spoken about increasing the number of “adults” in the classroom. The research on the effects of reducing class size, however, assumes that the pupil-teacher ratio refers to the number of students per “teacher,” not per “adult.” Apparently operating under a confused definition of reduced class size, EAI has implemented its plan by replacing experienced teacher aides with college graduate “interns” who have no teaching certification. According to an American Federation of Teachers (AFT) report: Seasoned paraprofessionals, who come from school neighborhoods, ... were replaced by inadequately trained, low-wage interns with very high turnover rates. This created instability in classrooms, as students lost relationships with familiar, trusted adults, and teachers were diverted from teaching to train as many as four new interns a year (1994a). An AFT analysis (1994b) of EAI's performance in Baltimore documented declines in student achievement, increases in pupil-teacher ratio, inappropriate removal of children from special education programs, the diversion of money from classroom instruction to overhead, irregularities in the administration of Chapter I funds, and failure to fulfill its promise to fully implement its “Tesseract” instructional program. Since the Edison Project proposes to use essentially the same mechanisms to produce profits, the same problems will likely emerge if and when Edison begins managing schools.
Neither the EAI nor the Edison educational programs contain any breakthroughs or startling departures from good educational practice. Both like cooperative learning and love technology and learning contracts, and they seem to have rediscovered developmental psychology, student-centered teaching, and the middle school model of education. Their pedagogy is enlightened; their educational promises, however, do not require a for-profit model. Indeed, the AFT analysis of the EAI experience in Baltimore illustrates how the need for profit undermines educational programs.
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. 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. However, despite all their talk about accountability, neither EAI nor Edison is prepared for accountability that translates into “no results, no money.” In a written response to questions from the Milwaukee Public Schools (MPS) in March 1994, Edison stated that it ... does not believe that its compensation should vary with student performance.... education is a complicated business and ... educational progress is notoriously difficult to quantify. We are committed to providing objective measures of student progress in every field of the curriculum. And we are confident that progress will be made. But we would be dishonest to say we can precisely forecast progress in every area quantitatively.... The partnership will not be improved, nor students helped, if the partnership schools are denied funds because a particular quantitative benchmark is missed.... We ask that MPS look at the big picture when judging the quality of the partnership.
No doubt plenty of public school superintendents and principals would be grateful for the opportunity to be held accountable the way Edison proposes to be held accountable. Edison is making the same arguments that public school educators have made for years with a notable lack of effect on the very policymakers and politicians who now support privatization.

Caveat Emptor

Some urban superintendents may think EAI and Edison are no-risk propositions. If the projects fail, the school system will, for once, escape the blame. If they succeed, the superintendent can claim the title of “visionary.” As attractive as this scenario may seem, it represents a false hope. Much is at risk when a school district signs a contract with a private “partner.” The district risks a potential scandal if the contract is not properly administered, and most districts do not have the experience or the resources to properly monitor such complex contracts. The district risks making things worse for most children in the district. Edison and EAI have the potential to reduce the amount of money available to educate other students in the district (because of the financial requirements of their contracts) and thus reduce the educational quality of the district overall. The district also risks polarizing the community in the struggle to bring in a for-profit contractor and thus undermine the chances of districtwide reform.
Another lure of the for-profits is their offer to make capital improvements or provide high-tech hardware that many school districts cannot afford. What sometimes gets lost in the discussion, however, is the simple fact that these offerings are not gifts. The school district will have to repay EAI and Edison in the form of profits. That means that the school district must ultimately raise the amount paid the project schools by either reducing the amount available to other schools, finding an outside source of revenue, or raising taxes. The only other alternative is to reduce the money spent on instruction and instructional support in the project schools. In Baltimore the amount of money available to non-EAI schools may be reduced as EAI draws money away from instructional support in its schools to make a profit.
Privatization seems attractive because it provides a comforting illusion of change without the sacrifices that would be necessary to bring about real improvement. It helps perpetuate the myth that the fundamental problems of urban schools are caused by bureaucracies, incompetence, and the self-interested greed of unions instead of crushing poverty, racism, and a lack of jobs. But the people asked to sacrifice by EAI and Edison are the lowest paid workers in the school district. Real school reform, especially in our nation's poverty-ravaged urban centers, will require sacrifice not by the poorest but by the most privileged members of our society. Real school reform requires a vision of justice to guide it—something neither the Edison Project nor EAI can provide.

American Federation of Teachers. (1994a). “Report Shows Private Manager's Profits Hinge on Less Instruction and Larger Classes in Public Schools.” A news release from AFT, Washington, D.C.

American Federation of Teachers. (1994b). “The Private Management of Public Schools: An Analysis of the EAI Experience in Baltimore.” Washington, D.C.: AFT.

ASCD Update. (March 1994). “Public Schools, Private Managers.” Alexandria, Va.: Association for Supervision and Curriculum Development.

Berliner, D. C. (April 1993). “Mythology and the American System of Education.” Phi Delta Kappan 74, 8: 633–640.

Carson, C. C., R. M. Huelskamp, and T. D. Woodall. (May/June 1993). “Perspectives on Education in America: An Annotated Briefing.” The Journal of Educational Research 86, 5: 259–311.

Celis, W., III. (December 9, 1993).“International Report Card Shows U.S. Schools Work.” New York Times, A1.

Fabrikant, G. (July 30, 1993). “Whittle Said to Scale Back Its For-Profit Schools Plan.” New York Times, D1.

Farrell, W. (March 5, 1994). “The Likely Impacts of Privatizing MPS: Can We Afford Them?” Milwaukee Courier, 4.

Hanushek, E. A. (1981). “Throwing Money at Schools.” Journal of Policy Analysis and Management 1: 19–41.

Hanushek, E. A. (1986). “The Economics of Schooling: Production and Efficiency in Public Schools.” Journal of Economic Literature 24: 1141–1177.

Hanushek, E. A. (1989). “The Impact of Differential Expenditures on School Performance.” Educational Researcher 18, 4: 45–65.

Hanushek, E. A. (1991). “When School Finance `Reform' May Not Be a Good Policy.” Harvard Journal on Legislation 28: 423–456.

Hedges, L. V., R. D. Laine, and R. Greenwald. (1994). “Does Money Matter? A Meta-Analysis of Studies of the Effects of Differential School Inputs on Student Outcomes.” Educational Researcher 23, 3: 5–14.

Jost, K. (March 25, 1994). “Private Management of Public Schools.” The CQ Researcher 4, 12: 275.

Marcial, G. G. (February 28, 1994). “A Very Bad School Report.” Business Week, 94.

Minneapolis Star Tribune. (October 25, 1993).

Minneapolis Star Tribune. (November 22, 1993).

Minor, B. (Summer 1993). “Education for Sale?” Rethinking Schools 7, 4: 14.

Office of Economic Opportunity. (1972). “An Experiment in Performance Contracting.” Washington, D.C.: Office of Economic Opportunity; Office of Planning, Research, and Evaluation.

RAND Corporation. (1972). “The Evolution of Educational Performance Contracting in Five School Districts, 1971–72. A Working Note.” Santa Monica, Calif.: RAND Corporation.

Reilly, P. M. (August 2, 1993). “Whittle to Launch Leaner School Project After Failing to Attract Outside Investors.” Wall Street Journal, B8.

Rethinking Schools. (Spring 1994). “Bad News for EAI.” Rethinking Schools 8, 3: 23.

Schmidt, P. (March 9, 1994). “E.A.I. Fiscal Health at Issue in Suit by 2 Stockholders.” Education Week, 6.

Schneider, K. (December 2, 1992). “U.S. Cites Waste in Its Contracts.” New York Times, A1, D24.

Toch, T. (August 16, 1993). “Whittling the Future School.” U.S. News and World Report 115, 7: 76.

Wohlferd, G. H. (1972). “Performance Contracting Overview.” Report. (ERIC Doc. # EDO79339).

Alex Molnar has been a contributor to Educational Leadership.

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