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'There Is No Free Lunch'

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Those who hope to improve public schools by privatizing their management should keep their eyes on Baltimore, where the largest experiment of its kind in the country is under way. The Baltimore experience offers a cautionary tale for any school district considering privatization. It demonstrates that there is no free lunch, and that the willingness of public officials to hold private managers accountable is crucial.

A private, profit-making outfit called Education Alternatives Inc. is running nine Baltimore public schools, providing everything from custodial to educational services. E.A.I. has promised to raise student achievement for the same per-pupil costs as other schools in the district. The firm also provides accounting and custodial services to several other schools, and Baltimore officials recently retreated from their announced intention to turn still more schools over to E.A.I.

What justifies this enthusiasm for E.A.I.?

It's certainly not student test scores in the E.A.I. schools. The first standardized test results since E.A.I. took over are in, and they are dismal. Scores went down in all E.A.I. schools. Moreover, the scores in the E.A.I. schools were a reversal of a promising upward trend the year before the company arrived--not a continuation of a downward trend.

Although these first-year test scores have been available since June 1993, school officials have never released them publicly. They explain them away by calling E.A.I.'s first year "transitional," claiming that E.A.I.'s education program was not fully operating when the tests were given. Why not? If E.A.I. couldn't provide a full program the first year, then the prudent alternative would have been to wait until it could. Instead, E.A.I. subjected Baltimore students to a "transition" that left them behind. It wouldn't be fair to expect a dramatic improvement in test scores the first year of a new program--even though that's what E.A.I. promised--but a decline is very unusual and disturbing.

Perhaps it's E.A.I.'s financial management that's so attractive to school officials. E.A.I. promised that, for the same per-pupil costs public schools receive, it would improve student achievement. But financial records show that the company received about $500 more per student than other Baltimore schools, partly because it has claimed more pupils than enrollment figures substantiate. E.A.I. is also having trouble accounting for some $400,000 in Chapter 1 funds. No matter--the school system has, in effect, "forgiven" this loss by reducing E.A.I.'s obligation to provide Chapter 1 services and substituting general funds for Chapter 1 funds.

E.A.I. wins kudos for cleaning up the schools, and students and their parents are happy to have shiny, clean schools in good repair. However, figures available from the Baltimore city school system show that E.A.I. financed its cleanup of the schools by dismantling special education, cutting remedial-education services, increasing class size, and cutting the funds spent on classroom instruction. The money saved through these so-called efficiencies went to travel costs, corporate overhead, and profit.

Inner-city school officials are in a tough spot: They must try to improve student performance in the face of diminishing resources and seemingly intractable social problems. It's no wonder they're tempted by the promises of private management firms. The idea makes for good public relations--people will think something is actually being done about the schools.

But public officials usually don't sign multimillion-dollar contracts without soliciting bids from several contractors and looking at their track records. Baltimore gave E.A.I. a sole-source contract, even though the company had absolutely no track record in managing public schools.

These contracts pose a difficult conflict of interest when it comes to accountability. Baltimore is a good example. School officials there want E.A.I. to succeed and have taken up the mantle as its defender. But these same public officials are charged with responsibility for holding E.A.I. accountable. Instead of asking hard questions about why E.A.I. is not getting results, they have dismissed the poor test scores and other problems--and given E.A.I. more money!

School officials reassure parents and taxpayers by pointing out that the contract with E.A.I. allows the district to fire the company with 90 days' notice. But officials have never said what kind of results would trigger a firing. How long will test scores be allowed to drop? How much money will be left unaccounted for? How many students can be denied required services, and how big will class sizes be allowed to get?

Accountability is not guaranteed by vague clauses about firing. Accountability is in the details--specific, enforceable standards for performance. These are sadly missing in Baltimore. Such standards should be specified in the contract between the district and the firm and made public. Even then, accountability standards mean nothing if officials do not enforce them. The children, parents, and taxpayers of Baltimore are dependent on the school board and Superintendent Walter G. Amprey to hold E.A.I. accountable, but, instead, Mr. Amprey is busy selling E.A.I. to other districts.

We all have an interest in improving America's schools, and it is for that reason that the American Federation of Teachers remains open to the possibility that private management might be made to work to the advantage of students, teachers, and taxpayers. Our concerns arise from E.A.I.'s failure to keep its promises, its questionable financial practices, and the obvious reluctance of local officials to hold the company accountable. We also question the underlying assumption here that public bureaucracies can't get anything done and that, therefore, private enterprise is the answer. Every other advanced industrial democracy has government schools--in some cases, run by national bureaucracies--and their students outperform ours.

The crucial questions are the same whether management is public or private: How can the public interest be protected? Are there provisions in place to keep the provider accountable? When there is money to be made by providing a public service, and when the lives of children are involved, accountability becomes even more urgent.

Without strict accountability, all the incentives are in the wrong direction, away from investing in schools and toward maximizing profits for shareholders. In Baltimore, even if test scores continue to go down, E.A.I. can continue to make a profit. The schools take all the risk, and E.A.I. takes none. E.A.I. gets its money up front, and, if it doesn't succeed, it's the students and taxpayers who lose. E.A.I. can take its profits and leave town, and the schools will be left to pick up the pieces.

In any such venture, profits should be contingent on performance, and the maximum amount of profit should be specified. A profit-making company, unlike people who work in the schools for a salary, has a built-in incentive to squeeze money out of services to kids. One way to resolve this issue might be to pay the company a fee when it meets specific performance benchmarks. Or we could treat these private firms like insurance companies, whose fees are negotiated. This would allow the company to make money when it succeeds and would help prevent harm to a district's students and finances if the company does not meet performance standards.

There is no evidence, in education or any other field, that private management, in and of itself, produces miracles or even decent results. As John Goodman and Gary Loveman argued in a 1991 Harvard Business Review article, both public and private management can produce poor services, high prices, bureaucratic paralysis, and corruption. Public officials have fiduciary responsibility to establish contractual protections, such as specific, rigorous standards for performance, careful oversight procedures, and independent evaluation. And it is their further responsibility to expose these arrangements to the clear light of day so that the public can know how its funds are being spent and with what results.

See the next article in this special report,

Benno C. Schmidt Jr., June 22, 1994.

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