Bullish on Schools

Education Alternatives Inc. claims it can run effective public schools and make a profit at the same time. But some people don't buy it

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David Bennett is making a sales pitch. The president of Education Alternatives Inc., Bennett, 48, has been invited to address the 51st annual meeting of the Citizens Planning and Housing Association, a Baltimore public service organization whose motto is “Our glass is half full!” Last July, with much fanfare, EAI signed a five-year, $133 million contract with the Baltimore City Public Schools to operate nine inner-city schools. It was the largest contract so far for the Minneapolis-based company, which claims it can improve the schools and make a profit at the same time. But the arrangement has its critics, so Bennett has spent much of his time trying to convince the citizens of Baltimore that EAI’s intentions are good.

Tonight, in the elegant 19th-century atrium of the George M. Peabody Library, the CPHA members listen carefully as Bennett—looking very businesslike in a navy blue, double-breasted suit, white shirt, and multicolored floral-print tie—explains what he calls “the Tesseract difference.”

“Tesseract, by the way,” he continues, “is a term that comes from Madeleine L’Engle’s novel A Wrinkle in Time. It refers to a conveyance to a new realm.” With that kind of talk, one would expect a Tesseract school to look like something out of a science-fiction movie. In fact, what EAI has done is to take some of the best school reform ideas—whole language, whole math, low student-teacher ratios, personal education plans for students, parental involvement, technology-based learning, and cooperative learning—and give them the trademarked name “Tesseract.”

“In a Tesseract environment,” Bennett explains, “the first and most obvious thing you see are two teachers in the classroom, where one would normally be the case… We try to create a circumstance where the teacher has more the attitude of being a ‘guide on the side’ rather than being a ‘sage on the stage.’ We believe that children already come to school with knowledge and ability, and that what teachers and educators must do is present information in a meaningful format that already relates to the knowledge the child has in order to extend that knowledge beyond where he or she is… We believe that you need to walk into schools and immediately be struck by the cleanliness of the school, the receptivity of the school. The individual classroom has to have a convivial atmosphere that is inviting to the child, so the child feels comfortable, welcome, and wanted… If you go into one of our classrooms, you’ll see children on the floor, often teachers on the floor right there with the children, involved in individual and small-group activities…

“Finally, and most importantly, we think one of the real contributions that special education has brought to public education is the power of an individualized education program. We’ve taken that notion and simply said, ‘If it’s good for the special education child, why isn’t it good for all children? Why don’t we develop a personal education plan for every child in the school?’

“Our goal,” he adds, “is not to circumvent the public schools. We don’t see ourselves as competing with the public schools. We are part of the public schools.”

All of this sounds well and good to the reform-minded members of the CPHA, but during the question-and-answer period that follows Bennett’s presentation, several audience members seem troubled by the “P” word: profit. One woman gets right to the point when she asks: “Why do we need a for-profit, private firm to do what you’re trying to do? Why couldn’t a nonprofit group do the same thing?”

Bennett responds by recounting his experience as superintendent of schools in St. Paul, Minn. “Despite the very talented people within the public-school system,” he explains, “there seemed to be this limit in terms of our capacity to meet the needs of the students.” But Bennett believes that when a private company— unfettered by bureaucratic rules and regulations and driven by a desire to satisfy its customers—enters the equation, anything is possible. In Baltimore, for example, EAI has subcontracted with Johnson Controls World Services Inc., a building maintenance company, and KPMG Peat Marwick, an accounting firm, to form the “Alliance for Schools that Work.” Johnson Controls is responsible for janitorial and food services at the nine Tesseract schools, while Peat Marwick scrutinizes the money flow, looking for ways in which to trim costs.

“These are resources that a single school district doesn’t have,” Bennett says, insisting that the profit motive is an incentive for EAI to cut down on bureaucratic waste—all too common in large urban school districts like Baltimore’s.

But the bottom line, Bennett says, is that there won’t be any profits if EAI doesn’t improve the nine Baltimore schools it has agreed to operate. “If we made money on the contract,” he says, “but didn’t provide the services, then the contract evaporates. So, first and foremost, we’re concentrating our time and energies on delivering that which we promised to deliver.”

Still, many teachers and parents in Baltimore wonder whether EAI can fulfill those promises and still turn a profit. Something’s got to give, they argue, and that something just might be their children’s education. “The main issue is the money,” says Vanessa Cooper, president of the parent-teacher association at Edgewood Elementary, one of the nine Tesseract schools in Baltimore. “I don’t want my children to get lost up in a money thing.”

The Tesseract concept was actually developed back in the 1980s by Control Data Corp., a Minneapolis data-processing company. The firm pumped more than $1 million into the project before deciding against getting into the education business. So, John Golle, cofounder of a company that designs educational and training programs for Fortune 500 companies, bought the Tesseract research from Control Data and, in 1986, founded Education Alternatives Inc. He is now the company’s chairman and chief executive officer.

Originally, Golle, 49, had in mind something like Christopher Whittle’s proposed Edison Project: a network of for-profit private schools that would charge roughly the same amount of money per student as the national average for public schools. In September 1987, EAI opened its first school, in Eagan, Minn., and one year later the company opened a school in Paradise Valley, Ariz. The schools proved that EAI was onto something: According to test results, children at both schools advanced more than a year and a half in achievement levels for every year of schooling. But the cost of operating the schools drained EAI’s resources, so the company decided to change its focus from owning a chain of private schools to managing existing private and public schools. EAI believed it was possible to reduce operating and administrative spending at schools by 25 percent, put 20 percent back into the classroom, and keep 5 percent as profit. “There is so much fat in the schools that even a blind man without his cane could find the way,” Golle has said.

In June 1990, Golle and his company were offered the chance of a lifetime. Following a nationwide search for companies with innovative educational ideas, the Dade County, Fla., school board approved a five-year, $1.2 million contract that would allow EAI to actually create and operate a public elementary school based on the Tesseract principles. No such pact had ever been made between a private company and a public-school system. “There are a lot of businesspeople who are on the shore, shouting instructions to the crew,” Golle said at the time. “We are in the boat; we are the crew.” As part of the deal, EAI agreed to raise $2.2 million from private donations to supplement what the district pays to operate the school. The company’s fee will also come from this money.

Meanwhile, in 1991, EAI divested itself of the Eagan and Paradise Valley schools (although it signed management agreements with them) and made its first common-stock offering of 1,663,690 shares at $4 each, raising more than $6million. John G. Kinnard & Co. Inc., a Minneapolis investment firm that underwrote the stock offering, told its investors: “Education Alternatives, with its current operating losses, short history, and lack of publicly held competitors, is a difficult entity to value. Since there presently are minimal revenues, large bottom line losses, and only the promise of more management contracts, the shares are likely to be somewhat volatile and event-driven over the foreseeable future. Nonetheless, we believe the company is well-positioned to participate in the huge, rapidly growing educational industry as the 1990s progress.... We strongly advise investors to tuck these shares away and essentially forget about them for a while in order to give the company time to really find its stride.”

South Pointe Elementary School, located in a run-down section of Miami Beach, Fla., opened its doors in September 1991, and during that first school year, some 2,000 visitors stopped by to see what the fuss was all about. What they found was a Chapter 1 school with 720 mostly minority students, 80 percent of whom qualified for free meals. Visitors to the brand-new, deco-style building also found two instructors—a teacher and an intern—and three IBM computers in every classroom, a library overflowing with books and magazines, and adult volunteers ready to lend a hand. News accounts of the school were nearly unanimous in their praise. Gushed one headline: “Start with a public school. Mix in private funding. Add students (and teachers) dedicated to education. The result? True learning.” The Portland Oregonian reached a similar conclusion: “In school run by company, learning is the bottom line.”

(EAI’s experience with the Duluth, Minn., schools was less successful. In March 1992, the school board there asked EAI to provide the district with an interim superintendent and to consider the possibility of running its schools on a long-term basis. When the four-month, $40,000 agreement was reached, school board President Michael Maxim told Education Week: “We’ll see whether all of this works out after we’ve had some crises. It’s still very much a honeymoon period.” Four months later, the honeymoon was over—and the marriage was dissolved. The school board was disappointed with EAI’s actions, and EAI declined to make a pitch to run the district full time.)

EAI’s efforts in Miami Beach did not go unnoticed in Baltimore, where city and school officials were looking for something—anything—that might have a positive effect on the city’s troubled schools. Considered the worst in the state, Baltimore’s 177 schools suffer from many of the same problems that affect other inner-city districts: high absenteeism among students, low student test scores, a chronic shortage of supplies, sporadic violence. Eighty-two percent of Baltimore’s 108,663 students are African-American, and many are poor; 67 percent qualify for free or reduced-price meals, compared with a state average of about 26 percent. The city’s annual dropout rate is 16.4 percent.

On July 22, 1992, following an emotional three-hour debate at city hall, the Baltimore City Board of Estimates voted 3-2 to sign a five-year contract with EAI, allowing them to operate eight elementary schools and one middle school. “I’m convinced that the adoption of Tesseract will be in the best interests of the children of the city,” Mayor Kurt Schmoke said at the meeting.

The city agreed to pay EAI $26.7 million—or $5,549, the district’s per-pupil average, for each of the projected 4,815 students—for the 1992-93 school year. EAI would be obligated to pay back $3.4 million to the school system for administrative costs, leaving $23.3 million to pay for the costs of operating the schools. The company would be free to cut costs (with the exception of teachers’ salaries) as it saw fit; any money left over would be EAI’s to spend—or keep—as it saw fit.

For its part, EAI promised to clean up the schools, improve student performance and attendance, and decrease dropout rates. The nine schools would become Tesseract schools; each student would have his or her own “Personal Education Plan,” designed, according to EAI’s literature, “to capitalize on each child’s unique needs and interests and to provide a written education game plan for each child.” Each classroom would have a telephone, computers, and a simple, old-fashioned rocking chair for teachers to use when reading stories to their students.

But trouble started brewing almost immediately. Parents were upset that they hadn’t been consulted about the proposed contract with EAI. And some teachers complained that the Tesseract program was being forced on them. When EAI offered teachers the opportunity to transfer to other Baltimore schools, about 40 (out of 160) opted to do so. And when EAI announced that it would replace the schools’ paraprofessionals—mostly high school graduates earning an average of $10 an hour plus benefits—with “instructional interns”—college graduates who would earn $7 an hour but no benefits— the Baltimore Teachers’ Union cried foul. In late August, union members picketed city hall as EAI began four days of teacher training in the Tesseract method. “We were deceived,” one teacher told the Baltimore Sun. “We were not treated as professionals.”

Loretta Johnson, president of the union’s paraprofessional chapter, said EAI was “like a dictatorship. The program is just being rammed down all our throats.”

“It’s just the opposite,” counters David Bennett. “We had no role whatsoever in the selection of the schools. The schools volunteered to be part of the project. Secondly, a number of people were involved in this, going back two years ago.” Besides, he argues, “this year was always designed as a training and implementation year.”

School superintendent Walter Amprey makes no apologies for turning the nine schools over to EAI so quickly. “If you wait too long,” he says, “you can almost talk yourself out of doing something. I knew that we had to get this done or else it might never happen.”

Although many in Baltimore seem willing to give EAI a chance, it’s clear that some parents and teachers remain dissatisfied. “Teachers are very resentful because some of the decisions that have been made are because EAI wants to make a profit,” asserts Baltimore Teachers’ Union President Irene Dandridge. “This was pushed through. There were no public hearings... Teachers don’t feel like they’re doing anything new.”

“The way EAI went about doing it is the major problem,” says Robert Wilson, president of the Baltimore Council of Parent-Teacher Associations. “It was rushed through without a lot of public input, and that discouraged a lot of parents.”

Denis Doyle, a senior research fellow at the Hudson Institute, an Indianapolis-based think tank, isn’t surprised at what he calls EAI’s “semi-fiasco” in Baltimore. “Someone failed to do their homework,” he says. “Without cooperation built in from the beginning, these types of programs aren’t going to succeed.”

At Edgewater Elementary School, a banner hanging from the ceiling near the front doors proclaims, “Welcome to Edgewood Elementary, a Tesseract School.” Located in Baltimore’s Walbrook neighborhood, on the city’s west side, the Chapter 1 school is home to 527 students, 68 percent of whom qualify for free or reduced-price lunches. Virtually all of the students are African-American, as is Shirley Johnson, Edgewood’s dynamic principal.

“This is a transitional year,” says Johnson, sitting at her office desk. Smartly dressed in a business suit, she is wearing gold-frame designer glasses, large gold earrings, and a gold necklace. “It’s going to be a slow process. And that’s great. Because that way, if we’re sure of what we’re doing, then it’s going to be effective when it’s implemented. And so far the components that we have implemented are going very, very well.”

Johnson explains one such Tesseract component: “We used to do schoolwide opening over the intercom to bring us all together first thing in the morning. Now we have what we call morning meetings, or community meetings. And we have cross-grade grouping. You’ll see a kindergarten class, a 5th grade class, and a 3rd grade class all together. It’s a time for sharing.”

When Johnson first heard about the Tesseract system, she thought it was something that could have a positive impact on her students. Although Edgewood had already abandoned basals in favor of whole language, Johnson knew that it wasn’t enough. “I thought, ‘We need something else to increase the academic achievement of our children.’ I said to my teachers: ‘We work hard, but we just aren’t hitting it. Something is missing.’ So we were receptive [to EAI].”

She admits that it wasn’t easy for her teachers to see their paraprofessionals replaced by instructional interns. “The teachers had bonded with them,” she says. “They had been here for a while. But it was just a model that had to change, and we are dealing with that paradigm shift.” Besides, she adds, “we have seven male interns now. We have never had a male in this school. So that’s a big plus, to have a male image in the classroom.”

Johnson is especially pleased with the way EAI has improved the physical aspects of her school, which was built in 1957. “I had a serious plumbing problem. And they have really fixed that. Our boilers were really in bad shape. In fact, one of them was shut down. But they have brought people in to take care of things right away. And they are eliminating the bureaucracy. I’ve even got a fax machine in the office, so I can order things directly from companies, whereas before I had to fill out a requisition form and send it to North Avenue [where the central office is located]. Now, as long as it’s less than $1,000, I can order it immediately.”

Thanks to EAI, Edgewood also has a brand-new copying machine—a considerable improvement over the previous model, which the staff had to rent with money from their own pockets. “We had to pay for that!” Johnson exclaims, dumbfounded.

Johnson is proud of the fact that only one Edgewood teacher opted to transfer when it was announced that EAI would run the school. “I did not have any turn- over in other staff members,” she says, “and that was a blessing because that told me they wanted to be here.”

Sandy Watt, a 20-year veteran of Baltimore’s public schools, is Edgewood Elementary’s lead teacher. Every Tuesday, she and the other lead teachers go to Harlem Park Middle School to be trained in the Tesseract system. The following afternoon, back at their respective schools, the lead teachers share their knowledge with their colleagues during the weekly staff-development session. (Students go home early on Wednesdays to allow time for these sessions.)

So far, Watt is impressed by what she’s seen. “I am one who is always interested in change, in learning something new,” she says. “So I’ve been very excited about it. I think it helps that we’re moving slowly, instead of trying to rush everything, taking it step by step so that we know what to do the next go-around.”

She praises Johnson for communicating with the teachers and getting their input. “There were some concerns at the beginning,” she says, “but we’re moving slowly through the process. And any questions and concerns are brought out and answered. So, I think that the teachers are pulling to make the Tesseract model a success. The teachers are buying into the program, and, once they buy into it, you’re going to have more success.”

If EAI is to succeed, it will have to win over parents like Vanessa Cooper. The president of Edgewood’s Parent-Teacher Association, Cooper has two daughters and a niece at the school. And she worries about their future. “I think everybody’s trying to give it a chance,” she says. “We’re going by faith, believing what they tell us.” But she is wary of business getting involved in public education. “I really hope their thing is from the heart. When you have a company that takes its employees to heart, then you have a fantastic company. But when you have a company that’s only concerned with money, money, money—that’s when you have to watch out.’

John Golle can't understand why some people think profits and public education shouldn’t mix. After all, he points out, don’t computer companies sell their equipment to schools? Don’t school supply companies make money? And what about furniture companies? Don’t they make profits by selling desks and chairs to schools? “But unlike those companies,” he says, “we only get paid if students learn.”

As David Bennett puts it: “It’s a performance contract. That is, now, for the first time in the history of any school district in the country, a company can go out of business if the students don’t learn.”

It’s that kind of incentive that makes Carol Clark, director of research at John G. Kinnard & Co., bullish on EAI. “I think they’re going to be a long-term winner,” she says, pointing out that EAI’s stock is now trading in the low- to mid20s, and that its most recent quarterly earnings report showed a net profit of $235,293, or four cents a share. Clark has looked at what EAI is doing in Baltimore and likes what she sees. “I think it’s working,” she says. “I would send my kids to school there.”

Furthermore, Clark believes that public education represents a golden opportunity for business in general. “We firmly believe that increasing enrollments, poor test results, weakening international competitiveness, and increasing parental involvement and concern are likely to accelerate the clamor for change,” she writes in her most recent research report on EAI. “Keep in mind that even if only 5 percent of the total money spent on K-12 education in 1991 were put toward new philosophies, it would still create an industry worth $11 billion. We believe that as established trends intensify moving forward, a number of businesses will be looking for ways to partake in the effort.”

Denis Doyle of the Hudson Institute is less optimistic: “Are there profits to be taken from [public] schools? I think, over the long haul, there aren’t. And I think the evidence is pretty clear.” Would he invest his money in EAI? “Not a nickel. I cannot see any money in it.”

For EAI to continue to grow and prosper, Clark says, the company will need to sign more management contracts with school districts. Her research report says that “over the past two years, EAI has had serious discussions with more than 20 school districts around the country regarding the implementation of its services.” Clark thinks that, by next September, EAI will have completed two such deals, and she believes it is likely that nine more schools will be added to the Baltimore contract.

Superintendent Walter Amprey, however, may have other ideas. He’s pleased with the way things are going at the city’s nine Tesseract schools, but he says that if the experiment proves successful, his preference would be for the Baltimore school system to replicate the Tesseract program on its own. “They’re not magicians,” Amprey says of EAI.

Last July, the company completed a second public stock offering of 425,000 shares, which resulted in net proceeds of about $1.9 million. And one month later, EAI completed a private stock offering, which brought in another $700,000. In addition to managing more schools, the company hopes to market its Tesseract system to schools that aren’t directly managed by EAI. (In June 1991, EAI signed a five-year, $250,000 contract with the Granite School District of Salt Lake City to provide two elementary schools with training and materials.) “We don’t anticipate this being a large part of our business,” Golle says in the company’s annual report, “but it can and should be a very profitable and productive aspect of a total enterprise.”

Meanwhile, EAI has pitched an offer to run 14 schools in the Palm Beach County, Fla., school system. The proposal has been greeted with stiff opposition from the Palm Beach County Classroom Teachers Association, which represents all 7,300 of the county’s teachers. “We’re not opposed to innovation,” says Executive Director Van Ludy. “But we started hearing some bad things about [EAI], especially out of Baltimore. So we thought we’d better take a closer look. They just don’t have enough experience with the public sector. They don’t have a track record. Baltimore is their only example, and, if that’s what they can hold up as a shining star, then no thanks.”

Golle says he’s astonished at the Palm Beach County CTA’s opposition to EAI’s proposal. “It absolutely blows my mind,” he says. “I would think that the teachers’ unions would pay for us to come in.” He runs through a list of things that teachers say they want: more supplies, smaller classes, more computers, to be treated as professionals. “Well, we provide all of those things.” Why, then, are teachers so skeptical? “People don’t like to change.”

Denis Doyle isn’t surprised that EAI has encountered so much opposition from teachers and administrators. A project like the one in Baltimore, he says, “represents a direct intellectual challenge. It’s an admission by the school district that what they’ve been doing is completely wrong.... No institution is good at managing decline.” What EAI is attempting to do, he adds, is “a very exciting idea. It’s a shame the system is so resistant.”

Back in Baltimore, the nine Tesseract schools continue to take shape, and teachers are getting used to the program. “They see that we are for real,” Golle says. Mae Gaskins, EAI’s vice president of school operations, who is overseeing the Baltimore project, adds, “I think the whole argument about dollars and profits will fade into the background, because the bottom line is, we’re here to do what’s best for the kids.”

At Edgewood Elementary, a computer lab has been set up, and the wiring has been completed for the classroom computers and telephones. The rocking chairs have arrived, and the teachers have held conferences with parents in order to establish the students’ individual education goals. By next September, the Tesseract program should be in full swing. “We’re making steady progress,” says Shirley Johnson.

David Bennett knows that EAI’s future is on the line, and that, ultimately, the company will be judged by results, not promises. “There’s only one way to win anyone over,” he says, “not by talking to them, but by winning them over by demonstration, where they actually see their schools getting better, getting cleaner. I think ultimately it will be our deeds that convince people, and frankly that’s the way it should be.”

Vol. 04, Issue 07, Pages 30-34

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