Private Enterprise

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Educators question whether the company can fulfill its promise to improve schools. Investors question whether the Minneapolis-based firm can turn a profit. But, ever since the country's two national teachers' unions declared an all-out war against the firm, few doubt E.A.I. will go anywhere anytime soon without generating intense debate.

It is difficult enough to resolve the questions raised by E.A.I. and what it portends--the potential onrush of private enterprise into the management of public schools. But the fact that many of the parties involved have an interest in muddying the waters continues to make the debate infinitely more complicated.

"There is no honest broker'' in evaluating E.A.I.'s efforts, observes Bella Rosenberg, an assistant to the president of the American Federation of Teachers, which itself has been accused of disingenuousness in its efforts to discredit the firm.

"The politics of the situation have made it difficult to get E.A.I. a fair hearing,'' opines Shirley N. Weber, a school board member for the San Diego Unified School District, where resistance from the local N.E.A. affiliate has stalled discussions with the firm.

In the short run, at least, the politics surrounding the company seem likely only to intensify. As the company last week was being eyed to manage the entire Hartford and Pinckney, Mich., school districts, the A.F.T. and the National Education Association were vowing not to let it land another contract to manage schools.

Investing Political Capital

Education Alternatives currently manages 10 public schools in Baltimore and provides services to two others there and one other in Miami Beach. The school districts involved, noting the relentless government and media scrutiny the endeavors have received, question how anyone seriously believes E.A.I. could get away with failing to fulfill its promise to improve schools.

President Clinton and officials within the Education Department have espoused a similar view, advocating that private firms be permitted to manage public schools as long as their efforts are closely monitored. Education Alternatives argues that its contracts--which enable school districts to terminate their relationship, with 90 days' notice, if dissatisfied--hold it even more accountable than the school systems' own administrators.

The unions, however, maintain that those government officials who bring E.A.I. into schools stake a substantial amount of political capital on the firm's success, and thus cannot be trusted to assess its efforts objectively. Baltimore, they note, recently expanded the number of schools under contract with E.A.I. from nine to 12, even while acknowledging that it was too early to judge how well the original nine schools were doing.

"Those whose political careers are on the line can no more be trusted to give an honest evaluation than a for-profit company that wants to hold on to a lucrative contract,'' Albert Shanker, the A.F.T.'s president, asserts in a recent opinion piece that appears as paid advertising in The New York Times.

"Mayors, superintendents, and school boards who hire outside companies have a vested interest in getting results that look good--whether or not student achievement has improved--because the political stakes are high,'' Shanker says.

Officials of cash-strapped school districts admit they also have strong financial incentives to give E.A.I. a chance.

One of the firm's prime selling points is its willingness to make up-front investments in facilities, computers, and teacher training that districts otherwise would be unable to afford on their own.

"I am in a school system that has a half-billion dollars worth of deferred maintenance,'' Superintendent Franklin L. Smith of the District of Columbia public schools explained at a recent forum at the Cato Institute, a public-policy research foundation in Washington. Smith, who hopes to have E.A.I. or a competitor manage up to 15 schools, went on to add that Education Alternatives had pledged to spend some $850,000 to $1 million on facility improvements that would remain even if the firm left.

The lure of up-front money affected school board politics in Pinckney, Mich., where voters defeated a millage increase and ousted three board members criticized as unable to control costs before the new board signed a letter of intent with E.A.I. in January.

Unions Draw the Line

The A.F.T. and the N.E.A. maintain that they are the only ones taking a candid look at Education Alternatives, and both unions have mounted all-out efforts to disseminate and publicize their overwhelmingly negative viewpoints.

The National Education Association has charged several of its divisions with combating school privatization and has dispatched staff members to help several local affiliates fend off E.A.I. The union's Center for the Preservation of Public Education--established last year to ward off privatization, vouchers, and other perceived threats to public schools--leads the way.

A handbook on privatization developed for the union's state affiliates contends that for-profit companies "pose a serious threat to democratically run, publicly accountable schools'' by blurring the lines of responsibility for public education.

"There is an inherent conflict between educating children and being a corporation having to answer to its stockholders,'' Judy Behnke, the center's director, contends.

But money is clearly an issue for the union, too. Its handbook expresses concern about the impact of privatization on the jobs, wages, and benefits of its members, especially non-teaching school employees. It notes that private contractors now operate 40 of the nation's 100-largest school-bus fleets and have made substantial inroads into food services and custodial work, mostly in the past five years. Mechanics, painters, and plumbers also have been hard hit, and those involved with data processing, printing, groundskeeping, and secretarial work, the handbook warns, are next on the list.

Although Behnke maintains her union's major objective "is to make sure all children can learn,'' the N.E.A.'s opposition to privatization appears to outweigh its interest in any educational improvements private firms may be able to offer. The union's Piscataway, N.J., affiliate, for example, recently issued a bulletin to its members alerting them that E.A.I. may be trying to make its way into the district. The missive urged members to look out for such warning signs as site-based-management initiatives, school restructuring to allow two teachers per classroom, and efforts to provide teachers with computers or telephones.

The Company They Keep

Despite charges to the contrary in local and national union literature, officials of Education Alternatives have repeatedly offered assurances in Hartford, Baltimore, and elsewhere that they are not out to cut jobs or wages.

But the company's efforts to calm district employees can hardly be helped by the fact the unions' harshest critics--conservative politicians and think tanks--tend to be E.A.I.'s biggest backers. Nor are its overtures to union locals likely made easier by the fact it tends to be invited in by districts where the assault on union interests has already begun.

In Pinckney, Mich., for example, the school board that chose to request a contract proposal from E.A.I. is the same one that triggered an unsuccessful recall drive and union civil suits by handing its bus services over to a private firm. Other E.A.I. supporters in the Great Lakes State include Gov. John M. Engler, a Republican who recently pushed through legislation curbing teacher strikes, and the Mackinac Center, a conservative think tank that has accused the Michigan Education Association's insurance subsidiary of inflating the costs of coverage for the state's teachers.

In New Jersey, E.A.I. was invited into the 6,100-student Piscataway Township school system by Superintendent Philip E. Geiger, who has built a national reputation for himself by privatizing food services and transportation and shifting $6 million to instruction in three years.

Battle of Baltimore

The American Federation of Teachers has repeatedly characterized itself as not opposed, in principle, to the concept of private management of public schools. It maintains it took an "open and cooperative'' stance toward Education Alternatives' entry into Baltimore and even helped the firm land its first public school contract, in Dade County, Fla.

But the Dade County contract did not amount to private management. In fact, officials of the A.F.T. affiliate there maintained from the beginning that they would have opposed the deal if it had. And members of the Baltimore Teachers Union were boycotting E.A.I. training sessions and rallying at city hall weeks before the city's first nine E.A.I. schools opened their doors in 1992.

In March of 1993, as E.A.I. was still putting its programs in place, the Baltimore union issued a "report card'' giving the company poor marks. The next month, the union alleged that a teacher had contracted Legionnaire's disease from one of the schools and accused the city of being involved in a cover-up when the health department found none of the environmental hazards associated with the disease.

Education Alternatives appears to have triggered the union revolt in Baltimore early on with its decision to bring into each classroom a college-educated intern, who would be paid about $7.25 an hour. To make room for the interns, the company then asked the schools' paraprofessionals--typically high school graduates paid $12.50 an hour--to apply for internships or transfer elswhere.

The interns remain a sore subject. The A.F.T., which represents teachers and paraprofessionals in the district, criticizes them as poorly trained, refuses to factor them into the equation in arriving at the high E.A.I. student-teacher ratios it publicizes, and maintains that their low pay results in a high turnover rate.

The company argues that the union exaggerates the amount of intern turnover. What's more, E.A.I. charges, 80 percent of those who do quit cite the disrespect shown them by teachers as their main reason for doing so.

The A.F.T. also asserts that student achievement has languished under E.A.I. At a recent press conference, the union released a report claiming that reading and math scores have dropped in the eight Baltimore elementary schools entrusted to the firm. Officials of the A.F.T. conceded that the tests it cited were taken in March 1993--before E.A.I. had its programs up and running. But, they said, the fact the scores had dropped significantly merited publicizing them.

The union's decision to regard the scores as valid came just months after the A.F.T.'s Shanker wrote a paid editorial urging readers to disregard any increase in the schools' test scores. It would be impossible, he wrote, to determine how much the scores were skewed by the coaching or exclusion of students before or after the company's arrival.

The A.F.T. report contained a litany of other criticisms and allegations. Most seemed to be put forth to substantiate the union's claim that Education Alternatives had "diverted funding from classrooms into facilities, overhead expenses, and profit.'' Almost all have been dismissed by the district, which has accused the A.F.T. of mounting "a deliberate campaign of misinformation'' to discredit the firm.

The A.F.T. also has sent letters to the U.S. Education Department that allege improprieties in E.A.I.'s management of Chapter 1 and special-education programs. The department has referred the complaints to state officials, who are expected to make a determination within weeks.

In Hartford, the A.F.T. has purchased newspaper, radio, and television advertisements to air its objections to the company and to urge parents to pressure the school board to end discussions with the firm.

Riding Bulls

John T. Golle, the chief executive officer of E.A.I., frequently espouses the motto, "Doing well by doing good.'' He maintains that his company cannot possibly succeed unless it proves itself by boosting student achievement.

The picture is complicated, however, by the fact that Golle's main stake in the company lies in his ownership of more than a million shares, or one-eighth, of its stock.

So far, critics charge, the stock's price has been driven far more by investor attitudes and the prospects of new contracts than by the company's record in schools. The stock, which went on the market in April 1991 at a price of $4 per share, peaked last November at $48.50 a share.

Profits were being made on E.A.I. "before we have any idea whether a single child in a Baltimore school is measurably better equipped to develop their minds and character than before,'' Shanker testified during recent Congressional hearings on the issue of school privatization.

The company's own rosy outlook has helped send stock prices skyward. On Aug. 26, for example, E.A.I. issued a press release over a public-relations newswire boasting that its students in Baltimore had shown significant achievement gains on computer-administered tests and that teachers in the nine schools it then had under management there viewed its efforts favorably. Analysts said the the press release was responsible for a one-week jump in the stock's price of nearly $3 a share.

Even Golle's supporters admit that he has been overly confident in assessing his firm's chances of landing contracts, many of which never materialized. And some analysts and investors became suspicious when, as the stock climbed near its peak, Golle and several company officials sold off several thousand shares.

Golle maintains that he and his colleagues in the firm had to sell the stock because they held five-year options that were about to expire. In his case, he says, failing to sell off 25,000 shares--a small fraction of his overall holdings--would have meant the loss of $900,000 in pretax income.

Nevertheless, the company officials' decision to sell helped draw the attention of analysts who specialize in finding overvalued stocks that investors should "sell short,'' or, in effect, make a profit by betting against the stock before prices fall.

One such analyst, Howard M. Shilit, a professor of accounting at American University in Washington, last fall issued a report charging that E.A.I.'s stock reports overstated the company's revenue because they factored in money that the company is contractually obliged to spend on teacher salaries and other fixed expenses. The assertion appeared in several newspaper and magazine interviews with Shilit and Stan Trilling, a short-seller of E.A.I. stock who has had Shilit on retainer to advise him on stock transactions.

Even though E.A.I.'s accounting methods had passed muster by the accounting firm of Arthur Andersen & Company and the U.S. Securities and Exchange Commission and were documented in a article in The New York Times early in the stock's climb, the current debate nonetheless has sent the company's stock plunging.

Tilting the Boards

The teachers' unions point to these Wall Street criticisms to back their contention that E.A.I. cannot be trusted.

The N.E.A. has gone a step further, arguing in its handbook for state affiliates that any private management of public schools creates a situation that is "ripe for back-room bargaining, sweetheart deals, kickbacks, bribes, nepotism, and insider trading.''

Certainly, the entry of private enterprise into the management of public schools has brought about prickly situations that public education has not encountered before.

In Baltimore, for example, Anthony J. Ambridge, a city council member, says he has received numerous calls from investors and stock analysts around the country in connection with the city's contracts with E.A.I.

"It is absurd,'' he says, "that I have to worry about the profitability of a for-profit corporation when the issue at hand is the education of children.''

San Diego school officials were recently embarrassed to discover that a brokerage-firm newsletter contained a bit of news they had not even told the public: that the board planned to bring up E.A.I. at its January meeting. No one involved claims to know how the information was leaked to the brokerage firm.

In Piscataway, N.J., the local N.E.A. affiliate has made an issue of the fact that Superintendent Geiger agreed to take a job as president of E.A.I.'s New Jersey division shortly after the firm approached the district about running some of its schools. The Piscataway Township Education Association claims to have filed a conflict-of-interest complaint against Geiger with the New Jersey School Ethics Commission. But a commission official recently denied that the complaint was ever filed. A lawyer for E.A.I. has threatened to sue the union local for defamation if it does not tone down its attacks.

But the unions, in urging suspicion of E.A.I.'s profit motives, have shown little of the same caution in choosing their allies against E.A.I, the company's backers say.

Union newsletters note, for example, that E.A.I. is being sued by Seymour Lazar and Daniel Zani, two disgruntled stockholders who claim the company overstated its revenues and future business prospects in an effort to inflate the price of its stock.

The suit is one of several class actions Lazar has filed against corporations. Court documents indicate that one suit brought by a man named Seymour Lazar sought damages from a rental-car company that charged him for gasoline when he returned the car with its tank less than full. Another challenged a telephone company's policy of billing callers for time they spend on hold.

Lazar's lawyer confirms that his client has filed class actions against corporations, but will not comment on specific suits.

The N.E.A. handbook quotes Baltimore City Comptroller Jacqueline F. McLean attacking the integrity of E.A.I.'s accounting methods. It fails to note, however, that McLean has been indicted on one count of theft and four counts of misconduct.

An investigative story in The Sun newspaper of Baltimore revealed that McLean had made two lengthy calls to a short-seller of E.A.I. stock before relaying, to a reporter for the CNBC cable-television channel, rumors of an S.E.C. investigation of the firm. The value of the company's stock took a sharp dip after that report aired. Golle says the S.E.C. is not investigating his company. The S.E.C. notifies the targets of its investigations but will not comment on its activities for the public.

Ideological Rorschach Test

In the long run, investors in pursuit of quick profits may have done E.A.I. more harm than good. There have been several difficult-to-substantiate reports that school officials who are involved in discussions with E.A.I. have received telephone calls from short-sellers intent on bad-mouthing the firm. One short-seller cited as a frequent source by Baltimore journalists recently asserted that the company was a "fraud'' and a "stock scam'' and stated--falsely--that two of the company's Baltimore contracts are strictly for janitorial services.

Such allegations have found their way into local debates. One rumor heard in several districts eyeing the company holds that E.A.I. is a maintenance firm. George Pope, the chairman of a District of Columbia advocacy group called the D.C. Coalition to Save Our Schools, has publicly characterized E.A.I.'s accounting methods as "illegal and unfit.'' He bases his charges, he says, on what he has learned through an investment club that he heads.

The national attention given to the debate over E.A.I. has also drawn several political-interest groups with various agendas into the fray, further complicating any discussions between the firm and prospective clients.

Pope's group has injected racial politics into the District of Columbia's debate, likening Superintendent Smith, who is African-American, to a "slave seller'' who offers the city's black children to the highest-bidding white men. In response, Golle points out that two of his company's five top officers are African-Americans and adds that the company aggressively recruits minorities.

At the recent Cato Institute forum, a representative of the American Civil Liberties Union was checking into whether E.A.I. respects student rights, while a member of the conservative Eagle Forum wanted assurances that the firm does not promote outcomes-based education. Followers of political maverick Lyndon H. La Rouche who oppose privatization have picketed school boards that have discussed doing business with the firm.

While most casual discussions between individual school board members and vendors tend to go unnoticed, discussions between E.A.I. and board members have brought allegations of violations of open-meeting laws. In fact, theN.E.A. and its local and Michigan affiliates filed suit against the Pinckney school board this spring over such alleged violations.

Silver Lining

Despite its troubles, Education Alternatives still foresees plenty of opportunity. The company has 26 people in its corporate offices, has brought on a seasoned labor-relations expert, and envisions enough potential business in Maryland, California, and New Jersey to appoint officers focusing solely on those states.

The company counts five governors as allies and retains impressive backers in other arenas as well. One of them is John Walton, the son of billionaire Wal-Mart founder Sam Walton. The younger Walton serves on E.A.I.'s board of directors and lent its stock credibility early on by buying more than 100,000 shares. Walton also counts as friends President Clinton and Hillary Rodham Clinton, to whom, he says, he has extolled the company's virtues.

The company sees potential markets in the growing number of states that have passed charter-schools legislation, as well as the handful of urban districts and the state of Maryland that are embracing "reconstitution''--the wholesale removal of district employees from failing schools. It also notes that the Goals 2000: Educate America Act signed into law by the President in late March contains a provision allowing states to use federal funds to experiment with privatization.

Even if E.A.I. fails, experts say, other firms likely will follow. When the Portsmouth, Va., school board recently solicited proposals for the private management of its district schools, it got 22 takers.

Vol. 13, Issue 35

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