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Published in Print: September 4, 2002, as Edison Buffeted by Probe, Loss of Contracts

Edison Buffeted by Probe, Loss of Contracts

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Edison Schools Inc., already pummeled by falling stock prices and opposition to its work, is being booted out of school districts in Texas and Georgia, and has come under investigation by state and federal authorities who want to know how it secured two contracts in Pennsylvania.

The nation's largest for-profit manager of public schools is well acquainted with controversy, but it has experienced more than its typical share of bumps in the past month.

First came the Aug. 6 disclosure that the inspector general of the U.S. Department of Education would investigate whether anything improper occurred between the New York City-based company and Pennsylvania officials in the awarding of Edison's $60 million, five-year contract July 31 to manage 20 of Philadelphia's lowest-performing schools.

Pennsylvania Auditor General Robert P. Casey Jr. had begun in January an examination of why the state awarded Edison a $2.7 million contract in July 2001 to perform a study of the Philadelphia district without taking competitive bids. When the Education Department investigation began, Mr. Casey referred part of his inquiry to the federal investigators.

In the weeks after the federal probe was revealed came a double wallop: Two districts decided to terminate five-year Edison contracts two years early.

The Bibb County school board in Macon, Ga., voted Aug. 15 to terminate Edison's management of two schools there, citing as concerns persistent low test scores and high teacher turnover. The termination is retroactive to July 1, 2002.

With the support of Superintendent Mike Moses, the Dallas school board voted unanimously Aug. 22 to halt Edison's management of seven elementary schools there in August 2003. The Dallas contract, which paid Edison $39 million last year, was one of the company's biggest.

"We looked at the Edison schools' performance compared to the rest of the district, and it was not what we had been promised nor what we expected," said school board President Ken Zornes.

Cuts at Headquarters

Edison, which is laying off 15 percent of its headquarters staff to cut costs, has been battered for months by bad news, including the size of its Philadelphia contract for school management, which was far smaller than the company had hoped, and the announcement of a settlement in a previously undisclosed federal inquiry into its bookkeeping methods. ("Edison Outlines Strategies to Reassure Wall Street," Aug. 7, 2002, and "Edison Reels Amid Flurry of Bad News," May 22, 2002.)

Dan Quinn, an equity analyst with the Chicago-based investment-research firm Morningstar Inc., said recent events could create a "negative aura" that might hinder the company's ability to raise capital and win contracts.

"It makes it tough for them to go to new districts," Mr. Quinn said. "They'll say, 'If you're doing such a great job, how come people are canceling contracts?'"

Even so, Mr. Quinn said Edison's troubles did not necessarily indicate a job badly done. School boards can sometimes set unrealistic expectations for the amount and pace of improvement, he said. In addition, he said, tight economic times can make districts more inclined to terminate such contracts. Dallas cited budget constraints as a factor in its decision.

Edison's reputation "has been dealt several blows" recently, company spokesman Adam Tucker acknowledged, but he added that its leaders remain confident Edison is viable. He noted that it recently secured contracts to manage one charter school in Kansas City, Mo., and one in Indianapolis in the 2003-04 school year.

And allegations of impropriety in obtaining the two Pennsylvania contracts are "absolutely untrue," Mr. Tucker said.

"We believe a fair and objective review of the facts will show that Edison acted in honorable and appropriate ways," he said. Education Department officials refused to discuss their investigation, but acting Inspector General John P. Higgins Jr. confirmed its start in an Aug. 6 letter to U.S. Rep. Chaka Fattah, a Democrat from Philadelphia who had written to urge such a probe.

In his July 19 letter, Mr. Fattah requested that Mr. Higgins investigate "whether Edison schools improperly conspired with state officials to corrupt the selection and contracting process" of the School Reform Commission, the panel that was appointed to run Philadelphia's 200,000-student school system when the state took it over last December. The panel finalized the contract with Edison on July 31.

Rep. Fattah asked Mr. Higgins to evaluate whether Pennsylvania Secretary of Education Charles B. Zogby had inappropriately advocated Edison's interests while the company was negotiating its school management contract, and whether he had used threats or intimidation to influence the final contract terms.

In a July 18 letter to the Philadelphia commission's chairman, Mr. Zogby threatened to withhold $55 million in state funding unless Edison and other private managers of Philadelphia schools received extra per-pupil funding.

"There was a lot of heavy-handedness, and the question is whether he went over the line," Mr. Fattah said in an interview. He noted that state law forbids threatened punishment or promised rewards in the awarding of public contracts.

Secretary Zogby responded in an interview that neither he nor the state department of education had done anything improper on either of the two Edison contracts now under investigation.

The state agency followed all pertinent rules and regulations for granting Edison the 2001 study contract, he said. And in demanding additional per-pupil funding for Edison and other private managers to run schools in Philadelphia, Mr. Zogby said he was simply enforcing the conditions attached to the money by the legislature.

"Everyone who looks at either of these contracts will see we followed the laws as we are required to do," Mr. Zogby said.

Vol. 22, Issue 1, Page 3

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