Hartford Ousts EAI in Dispute Over Finances

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The nation's most extensive experiment in private management of public schools sputtered to an end last week as the Hartford, Conn., school board said it would end its partnership with Education Alternatives Inc. in a dispute over finances.

Three pivotal school board members, who were elected less than three months ago on a platform of keeping the Minneapolis-based company in Hartford, said last week that their support for the experiment had withered during more than two months of negotiations over how much money EAI should receive from the district.

"When push came to shove, we realized our interests were so far apart, and it was impossible to change the contract in a way that was mutually acceptable," said Ted Carroll, the vice president of the board and a former leading backer of EAI.

The end of the Hartford experiment is the second major blow to EAI in two months. In late November, the Baltimore school board voted to end its 3 1/2-year-old experiment in which EAI ran nine schools. The company has also faced the departure of several top executives and a battered stock price. (See Education Week, Nov. 29 and Dec. 6, 1995.)

In response to the Hartford board's action, frustrated EAI executives charged that the district was breaching its contract and threatened to close the computer labs the company had installed in five schools and remove equipment unless it was paid $3.6 million it says it is due.

"The board has failed to act in good faith and to deal fairly and honestly with EAI," said a letter faxed from the company to the school district on Jan. 24, one day after the board voted 7-2 to dissolve the partnership.

EAI was hired in October 1994 to run all 32 schools in the 25,000-student urban district, a groundbreaking effort that attracted nationwide attention. (See Education Week, October 12, 1994.) The arrangement later was altered so that the company would initially control the district's budget and make improvements in just six schools.

John T. Golle, the chairman and chief executive officer of EAI, said in a written statement last week that the company has spent more than $11 million on technology and other improvements for schools in Hartford, but as yet has been reimbursed for only a "token" $343,000.

"Despite having funds in the budget to cover specific operating expenses, the board has failed to reimburse us for those same services they requested," Mr. Golle said in the statement. "Per the contract, our profits were to be derived through savings, but budgeted expenses must be paid monthly, and we have not been reimbursed since the beginning of the contract."

No-Lose Proposition?

In an unusual arrangement, EAI agreed to introduce more-efficient management and budgetary practices to the Hartford district, then keep any savings it found in the budget as its profit.

Board members and critics of EAI say the company essentially had offered Hartford a no-lose proposition, but later tried to alter the arrangement to ensure that it would profit.

"We had a contract that essentially put most of the risks on EAI," said Mr. Carroll, the board vice president. "Now they wanted to shift the equation so that they would be guaranteed payment.

"What EAI has learned is that they couldn't deliver on all the promises they made in Hartford, and it has cost them millions of dollars and it has tarnished their reputation," Mr. Carroll added.

Cheryl S. Daniels, the president of the Hartford Federation of Teachers, a fierce opponent of EAI and of private management of public education, said the company's efforts to wring savings from the school budget consisted of an attempt to slash teaching positions and "stuff more kids into classrooms."

"From the very beginning, we thought EAI would self-destruct," she said. "They were basically a dog-and-pony show."

However, Thelma Dickerson, a longtime EAI supporter and one of the two school board members who voted against ending the partnership, said the experiment was undermined by union opposition and political maneuvering.

"The political scene here is so rotten," she said. "I don't doubt that there were problems with the way the contract was written. But something of this magnitude should be open for review and reassessment."

As in Baltimore, the Hartford district's purse strings are largely controlled by the municipal government. News reports in Hartford suggested that a majority of the City Council opposed the contract with EAI and that city officials had blocked any proposal under which EAI would have been paid other than by the formula in the contract.

EAI officials told the district last week that unless it was paid soon, it would suspend services as of this week.

Phillip E. Geiger, EAI's president, said in an interview last week that the district's refusal to reimburse the company makes no sense because money for such items as computers, copiers, and financial management already are appropriated in the budget.

"It's an irrational point of view," Mr. Geiger said. "We agree we have to get our profits from any savings. But they always knew they had to provide financial management for the system, for example. To not pay us for that is ridiculous.

"We've learned some lessons in this process," he added. "Even a board like Hartford that indicates a commitment to reform tires easily."

City officials said late last week that they are willing to have a mediator resolve the dispute.

'A Lousy Contract'

The EAI experiment in Hartford has been watched closely by observers of the trend toward private management of public schools.

"This is obviously something the [teachers'] unions will use as much as possible to discredit the whole idea," said Myron Lieberman, a senior research scholar at the Social Philosophy and Policy Center in Bowling Green, Ohio.

Mr. Lieberman, who advocates free enterprise in public education, said, "The real issue was not whether EAI was efficient, but whether the school board has a right to try [privatization] without mass sabotage from the unions."

John M. McLaughlin, the editor of the Education Industry Report newsletter, said that one lesson from the Hartford experience was that EAI had "a lousy contract."

"The company clearly has to demonstrate how it is going to make these contracts work," said Mr. McLaughlin, who has closely followed EAI. "They have to develop contracts that are not cancelable at a political whim."

Except for Hartford, EAI has no other current contracts to operate schools. Last month, Mr. Golle told the publicly held company's shareholders that EAI's future would no longer be in urban education, but with "less political and less volatile" suburban districts. The company is believed to be in discussions with suburban districts in New York state and New Jersey. Mr. Golle also has acknowledged that EAI is continuing efforts to forge partnerships with some District of Columbia schools, which recently received authority to contract out on an individual basis.

EAI's stock, which once traded for $48 a share, went as low as $3 last week after the Hartford board acted. It closed on Jan. 25 at $4.25 on the Nasdaq market.

Whether any district would be willing to hire EAI after its bruising experiences with Baltimore and Hartford is a legitimate question, Mr. McLaughlin said.

"But I think the answer is, some will," he said. "The problems and politics of major school districts are so bad that when a private company comes in with its resources and business attitude and they fail due to mistrust and miscommunication, then it's very sad. It's sadder for public education than for the private companies."

Vol. 15, Issue 19

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