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Education Inc.

Sizing Up the Companies Vying to Run Baltimore's Schools

Jefferson Jackson Steele
Jefferson Jackson Steele
Jefferson Jackson Steele

By Molly Rath | Posted 2/16/2000

No sooner did state education officials announce Feb. 1 that three failing Baltimore City public schools would be run by private operators starting this fall than panic among parents and teachers set in, and politicking among union and elected officials to derail the plan began. Three years after a city-state partnership yanked control of the school system from City Hall, this latest attempt by the state to salvage Baltimore's broken schools has sparked rancorous debate.

The fury has been largely philosophical, turning on the big issues of privatization and state control. There's been little public discussion of the organizations that seek to do what heretofore has been undoable: turn the academic tide at Gilmor, Montebello, and Furman L. Templeton elementary schools, where more than 90 percent of students have failed to meet state academic standards for six straight years.

It's no secret that private management of public schools is a huge experiment--especially in Baltimore, where the wounds from a failed early-90s privatization effort are still fresh. But the city's next foray into the commercial-education market represents an even bigger gamble--the first time anywhere in the nation that a state, rather than an individual school district, is contracting operators to run traditional, failing public schools in a district. And of the companies seeking to get in on the ground floor of that gamble, one has been in the education business for slightly more than two years, and the other is run by an entrepreneur with a national profile but a checkered business past--and little experience running bottom-of-the-barrel schools.

Following nearly a decade of fruitless stabs at academic betterment, the stakes loom large--for the Maryland Department of Education, after six years of threatening schools with "reconstitution" for failing to make the state grade, and for Baltimore City, home to 83 of the 96 schools on the state's list of schools ripe for takeover. Who gets picked to do the job and how the choice (or choices) fare will provide the first tangible measure of whether state intervention has made a difference--and, some say, of whether true education reform in Baltimore is possible.

The stakes are also high for the entities pinning their reputations--and, possibly, their financial futures--on the three schools' reconstitution. Mosaica Education Inc. and Edison Schools Inc., both for-profit companies from New York, are duking it out for a Baltimore foothold. (A third finalist, a team pairing the Johns Hopkins-run Kennedy Krieger Institute and the philanthropic Erickson Foundation, withdrew from the running Feb. 4, removing the only local and nonprofit presence from the competition.) Both finalists are backed by Wall Street investors betting that public-school systems will continue to struggle. "Our future is highly dependent upon the development, acceptance and expansion of the market for private management of public schools," Edison Schools acknowledged in a disclosure statement the company filed with the U.S. Securities and Exchange Commission before it went public last fall. "If this business model fails . . . the growth of our business and our financial results could suffer."

Wall Street is awash in investment capital these days, and much like Internet start-ups, education-management organizations (or EMOs, as they're known) are a hot commodity. That momentum is fueling Mosaica's and Edison's hopes to expand into Baltimore. "We see tremendous potential for growth on a national level," Michael Connelly said in October 1998, when his New York investment firm, Lepercq Capital Management Inc., acquired a majority stake in Mosaica. He left Lepercq soon after to become president and CEO of Mosaica, then a fledgling firm with two schools.

Other financiers saw the same thing. In April 1999 another New York investment firm, Murphy & Partners, put up $10 million for Mosaica, and two of its top executives joined the EMO's board. With its newfound cash, Mosaica has opened 10 schools.

Wall Street has been even kinder to Edison, throwing $161 million in private investment its way to date. J.P Morgan Capital Corp. gave the company at least $20 million; a venture-capital firm owned by Microsoft co-founder Paul Allen gave $30 million. Nine of the 14 seats on Edison's board of directors are occupied by investment firms. With such largess, the company now runs 79 schools.

To Edison and Mosaica, Baltimore offers all-new expansion opportunities. In a business in which critical mass is key--more schools means lower overhead and higher profits--the city's troubled 183-school network is an attractive prospect. Additionally, the state's plan offers operators unprecedented freedom to operate with complete autonomy from the local school board. The only role Baltimore will have in reconstituted schools is issuing paychecks. (The management companies will receive the same per-pupil allocation accorded all city public schools, roughly $8,000 a year.)

"Our entire reason for existence is to implement our program in public schools. We want the ability to implement [that] program with all of its facets in an unfettered way, and we believe the [Maryland] school reconstitution will allow us to do that," Mosaica's Connelly said in an interview earlier this month. "It's a huge commitment and investment, and we're doing it . . . because we'll be given the opportunity at one, two, or three schools to demonstrate. If we're successful there, we will have the opportunity to manage other schools in Baltimore and other places. And we can build a company based on success."

The state declared Mosaica and Edison reconstitution finalists on Feb. 1. "They've made it through a qualifying round" and are "reasonably capable of winning" a contract, says Ron Peiffer, assistant state schools superintendent. The next step will involve intensive reviews of the companies by state officials, with a decision expected in early March. The firms could split the schools, or one could be contracted to run all three.

Mosaica grew out of Prodigy Inc., a chain of corporate child-care centers founded by Dawn Eidelman, an English professor at the University of Texas at Arlington, and her husband, Gene Eidelman, a Russian-born real-estate developer. The couple expanded the chain to 16 centers in six states and boasted six of the nation's largest 10 corporations as clients (including General Motors, IBM, and Amoco) before selling to a larger child-care company in 1995. The sale provided seed money for Mosaica and brought the Eidelmans together with Connelly, an officer of the company that purchased Prodigy.

Having experience at both the preschool and college levels, Dawn Eidelman developed an interest in the "chasm of quality" of education between the two, according to a company biography on Mosaica's Web site. She and her husband launched Mosaica in 1997 with charter schools in Saginaw, Mich. and Bensalem, Pa. Connelly came on board the next year to oversee three more new schools; another five opened last fall. Together, the Mosaica schools serve 3,000 students.

The Mosaica program emphasizes technology (providing one computer for every three students); extensive staff development; close ties with parents (the schools require parents to volunteer a few hours every month); and partnerships with communities, universities, and businesses. It implements an extended school day and year, and full-day kindergarten that includes foreign-language instruction. Mosaica's curriculum incorporates various science and math programs, phonics for kindergarten through second grade, and the firm's own Paragon Curriculum to teach social sciences. Connelly says Paragon is designed to give students an understanding of how they got where they are today. Developed by Eidelman, it teaches geography, history, literature, and the arts over 10 segments of the school year, representing 10 periods of time, prehistory to the present day. All grades follow the format, with age-appropriate activities and lessons.

So far, all of Mosaica's schools are charter schools, public schools (often new) that are independently run but still answerable to the local bureaucracy. The company has schools in several suburbs and midsize cities, the biggest being Lansing and Flint, Mich., with populations of approximately 130,000 each. Connelly says student income levels also vary. At the firm's school in Highland Park, Mich., a community of 20,000 surrounded by the city of Detroit, 80 percent of students qualify for free or reduced lunch, Connelly says; at the Bensalem school, on suburban Philadelphia's tony Main Line, just 15 percent of students are eligible for such aid.

"Baltimore would be the biggest city we're in," Connelly says, but he maintains the problems the city's schools face are familiar to Mosaica. Like students at the Baltimore schools the company seeks to run, "the vast majority" of Mosaica students enter the firm's schools below grade level, he says; on average, 82 percent of students nationally perform better.

To measure student performance, Mosaica issues the Iowa Test of Basic Skills, a national standardized test, at the beginning and end of the school year. In 1998-99, Connelly says, students achieved an average one-year gain, meaning that if they started a year below grade level, by spring they were on target. The company credits its program, but Connelly concedes that the fact students come to Mosaica schools from all over a region, and by choice, contributes to the progress.

Though more established than Mosaica, Edison would also be swimming in new waters under Baltimore's reconstitution. In its fifth year of school management, the company operates 79 schools, two-thirds of which are existing public schools under contract with local districts, one-third of which are public charter schools.

Edison is the latest business venture by entrepreneur Christopher Whittle, who launched his career at the University of Tennessee in the early 1970s, peddling guidebooks to orient college freshmen to their campus surroundings. Although his success was mixed, the guidebooks led to other publications, pushing Whittle to the next level: magazines and other media tailored to single advertisers. By the mid-1980s, Whittle Communications was a media empire.

As he built his personal fortune, Whittle attracted attention with an opulent lifestyle, traveling by corporate jet and hiring celebrity architects to design a Vermont vacation home and a luxurious New York apartment. But he made his biggest splash with Channel One, a commercially sponsored newscast Whittle began selling to public-school systems in 1989. To many, Channel One crossed the sacred line separating public education from crass consumerism: For every 10 minutes of current-events coverage, there were two minutes of advertising. Nonetheless, Channel One struck gold, reaching 8 million students in 12,000 schools.

But even as Channel One spread, Whittle's empire foundered. In 1994 he was forced to sell and shutter operations, "amid allegations that the enterprise was done in by lavish spending and questionable accounting practices," Hoover's 1996 Company Profile Database reported. Time Warner and Philips Electronics acquired a majority stake in Whittle Communications. But as they took with one hand, the corporate giants gave with another, helping contribute $45 million to launch Whittle's next venture: the Edison Project, recently renamed Edison Schools.

At Edison, Whittle is making another commercial foray into the classroom, and it's again proving lucrative. According to Edison's prospectus, Whittle enjoys a base salary of $320,366. Depending on company performance, that salary is subject to annual increases of 8 percent or more and annual bonuses of up to 50 percent. Additionally, Whittle is a significant shareholder and stands to make millions if Edison's stock price goes up.

Whittle initially envisioned Edison as a for-profit chain of private charter schools offering better academics than public schools at roughly the same cost, and he wasn't shy about his ambitions. In 1994, he projected the company would run 200 schools by 1996 and 1,000 soon thereafter, would turn a profit within four years, and would generate annual revenues of $2.5 billion. Critics who contended his claims were inflated, Whittle told The Washington Post in 1996, "will eat their words."

So far, though, it's been Whittle doing the dining. Before opening schools in 1995, Edison switched gears; rather than starting private schools, it began taking over public ones. Financial analysts liked the idea and predicted profits in three to five years. But the public-school contracts that have become Edison's bread and butter have hardly proved a windfall. The company currently serves 38,000 students in 79 schools and has incurred substantial losses in every fiscal period to date. "We have not yet demonstrated that public schools can be profitably managed by private companies and we are not certain when we will become profitable, if at all," last fall's prospectus reads.

Merrill Lynch & Co. analyst Kathleen Bailey downplays Edison's lagging financial performance as typical for a start-up; she foresees a break-even year in 2003, when Edison enrollment is projected to reach 126,000 students, and a profit in 2004 on anticipated revenues exceeding $1 billion. (Merrill Lynch has reason to be bullish: It helped underwrite Edison's public offering.)

The company's ability to justify such optimism hinges on prospects such as Baltimore. It also hinges on multiple-school markets, making the city and its 83 reconstitution-eligible schools particularly attractive. "We've learned over time it's better to have several [schools] than to have one," says Richard O'Neill, Edison's vice president of development.

The firm also has attracted some high-powered adherents. Sharing the helm with Whittle is board chairman Benno Schmidt Jr., who left his post as president of Yale University in the early 1990s to lead the Edison research-and-development efforts. John Chubb, a senior fellow at conservative think tank the Brookings Institute, is Edison's chief of education; Christopher Cerf, associate counsel to President Clinton from 1994 to 1996, is general counsel; and Michael Finnerty, a former New York State budget director, is executive vice president of schools. And Whittle has filled the company's ranks with former school superintendents.

Edison's school-management formula has five basic tenets, O'Neill says:

  • an ability to tap a national pool of principal and teacher candidates, and intensive staff training;

  • community-based schools with elected parent advisory councils and teacher involvement in decision-making;

  • pervasive use of technology--most students get take-home computers, and all teachers get laptops;

  • an extended school day and school year;

  • use of the Success for All reading curriculum developed by Johns Hopkins University and the University of Chicago Mathematics Project.

Edison spends about $1.5 million up front per 500 students to implement these plans, then relies on school systems' per-pupil allotment to cover operations, O'Neill says.

The company also pays higher teacher salaries than public schools and offers stock options as recruitment incentives. But local staffing could prove tricky, given Baltimore's dearth of skilled teachers and Edison's own companywide staffing needs--20 principals and 750 teachers this year alone. The fall '99 prospectus (a document that, to be fair, is designed in part to paint a worst-case scenario for potential investors) says teacher turnover at Edison schools exceeds the national average due to their longer school day and "challenging locations." Given a national teacher shortage, the prospectus warns, the firm "may not be able to attract and retain highly skilled principals and teachers in the numbers required to grow our business."

Baltimore's woeful academic record would pose a challenge for any firm. The 1996 National Assessment of Education Progress, a study ranking fourth- and eighth-graders in urban school districts nationally, put Baltimore eighth-graders dead last in science and math and fourth-graders near the bottom in reading. But O'Neill notes that the company has schools in urban centers such as Detroit; Kansas City, Mo.; Miami; and Washington, D.C., and its students are in the bottom third nationally when Edison moves in. "Whatever there is in Baltimore isn't going to be much worse than that," he says.

Only once has Edison gone into a school deemed low-performing by a state and targeted for intervention. But that school, Carver Heights-Edison Elementary in Goldsboro, N.C., is considered perhaps the company's best success story.

Goldsboro is a city of 130,000; 99 percent of Carver Heights-Edison's students qualify for free or reduced lunch. The school has failed state standardized tests since they were implemented five years ago; in 1998, after it made North Carolina's list of the state's 15 worst schools, the state made plans to send in an "assistance team" to help turn it around, according to Goldsboro principal Melissa Gainey. The local school board, which was considering its own reform measures, hired Edison to run the school beginning in September 1998. By the following spring, the percentage of students performing at or above grade level had risen from 32 percent to 50 percent, and the state team went home.

While few Edison schools boast that level of immediate success, O'Neill says students gain on average 6 percentage points per year on state and national tests. But the company acknowledges the absence of any reliable trend, noting in its prospectus (as does Mosaica's Connelly) that the opportunity to bring higher-performing students into its schools could be a factor in their schools' overall improvement. The firms will not have that opportunity in Baltimore.

Peiffer, the assistant state superintendent, reiterates that Edison's and Mosaica's records will be closely scrutinized, and both will undergo rigorous financial audits. He also notes that their history is typical in the nascent industry; most school-management firms got their start in charter schools. Because Maryland is out front of other states on school reconstitution, he says, "there are not going to be 40 or 50 companies out there that have experience with very tough schools."

And with the continuing disintegration of Baltimore's public schools, Peiffer concludes, state officials finally feel they have nowhere else to turn.

"What alternative would you suggest?" he asks. "We have left the school system in control of schools, we've let them put school-improvement plans together, we've let them select staffing. I'm not sure what [other] next step there is."

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