'Sweetheart deal of a lifetime' has a price tag City gave extra $18 million to manage EAI schools, leaving others with less

THE BALTIMORE SUN

First, they held the news conference. Then, for six intense weeks of faxes, phone calls and red-eyed meetings, they haggled over the details. Finally, the deal: Baltimore would bring private management to nine troubled public schools, all at no extra cost to the city.

Nearly three years later, the price is clear. Education Alternatives Inc. got at least $18 million more to manage those schools and three added later than the city would have spent ordinarily, according to school system analyses.

Baltimore siphoned the dollars, in effect, from other city schools because the system got no new funds for the privatization venture. If redistributed, that $18 million could have sent a new teacher to each of Baltimore's 182 public schools or bought 9,000 computers at $2,000 apiece.

Those six weeks of negotiations in the summer of 1992 have stretched into three years of controversy about private management of Baltimore's public schools.

The argument revolves around the lack of proven academic success at EAI's Tesseract schools and often comes back to money: Is it fair that they get more dollars than other schools? Is it right that a private company profit by running cash-strapped public schools?

While $18 million over three years amounts to just 1 percent of the city education budget, the disparity in funding has fueled criticism of the EAI deal from the City Council, the Baltimore Teachers Union, civic activists and school system insiders.

"I don't think we should be paying profit to an outside group," said Anna Coplin, principal of Cecil Elementary, a non-Tesseract EAI school in East Baltimore. "There are schools in need, and those schools are being deprived in order to pay [EAI] a profit."

But Superintendent Walter G. Amprey says EAI is no different than for-profit companies that sell the city pencils, textbooks and desks. He said the system "paid to learn" from EAI.

"It's hard to find anybody who doesn't make money off of education," Dr. Amprey said. "It's part of the American way."

"We're not talking about major carving or surgery on our budget that went to EAI," he said. "They got more money for those schools than they would have gotten ordinarily, but they got less money than they originally wanted."

An examination of city documents, correspondence and financial records underpinning Baltimore's experiment with privatization shows:

EAI's contract guaranteed that its schools had extra money to spend.

High enrollment projections by the school system gave EAI a $1.5 million windfall. When actual enrollment fell short, the contract let the company keep most of the money.

City oversight of EAI spending has been limited, and the city's chief overseer, Dr. Amprey, has often sided with EAI against his own top aides in battles over finances.

While EAI has yet to show solid student gains, shareholders have benefited as Baltimore revenue propelled EAI to higher stock prices and its first profits.

EAI took more than $6 million gross profit from Baltimore to company headquarters in Minneapolis, according to audited financial statements of its first two years here.

John T. Golle, the 51-year-old supersalesman who founded EAI in 1986, says his Tesseract reform program brought Baltimore "the sweetheart deal of a lifetime" - spotless schools, teacher training, classroom computers and financial expertise.

Mr. Golle, the company's chairman and chief executive, says that once corporate overhead (including executive salaries) is deducted from gross profit, EAI's net profit in Baltimore was $1 million.

He calls such profit a "modest" reward for a company that risked up-front capital and took on schools with more than their share of needy children. In fact, he says EAI is underpaid.

"We have never done a deal like this. We will never do another one," he said.

Splitting the difference

The key to EAI's Baltimore profits lies in the deal struck with city officials. Mr. Golle demanded the system's average cost per pupil: Take the school system's annual budget and divide by its projected number of pupils. Multiply the result by the Tesseract schools' projected enrollment of 4,815. Revenue to EAI: $26.7 million.

The school system countered that EAI should receive only what the city had budgeted to operate the nine Tesseract schools directly: $20.6 million.

The two sides nearly split the difference. EAI agreed to pay back part of the $26.7 million to the city for central administration. That left the company with $23.3 million, or $2.7 million extra - money to spend or take as gross profit.

That extra money is equivalent to the cost of operating a typical 600-student elementary school or the expensive Baltimore School for the Arts for a full year.

From the first, EAI said its proposal was "cost neutral" to Baltimore, meaning the city wouldn't have to increase school funding to pay for it.

Mayor Kurt L. Schmoke said he initially thought "cost neutral" meant Tesseract schools didn't need more money. But he later realized that while the contract didn't increase the size of the school budget, it did pay EAI a premium.

EAI schools got more money for two main reasons:

The Tesseract schools were moderate-cost. But the system's per-pupil cost as a whole is inflated by expensive special education, vocational and alternative schools. So, by receiving the systemwide average, EAI got more.

The Baltimore school budget included $27 million to send severely handicapped city students to high-cost nonpublic schools. Including that money in the formula that set EAI's revenues fattened the company's take by almost $270 per pupil.

"Golle always asked for the average cost per pupil," Mr. Schmoke said. "He didn't say, 'I can do it for the same amount you're spending in each of those schools.' He said, 'I want systemwide average cost.' So it is correct to say that these schools got a little bit more money than they did before, but they did not get above the systemwide average, which is what Golle said."

Following Mayor Schmoke's lead, the Board of Estimates

approved the no-bid contract. Council President Mary Pat Clarke and then-Comptroller Jacqueline F. McLean voted against it.

Mrs. Clarke challenged Dr. Amprey to select nine other schools, match EAI's per-pupil funding, and "see how they compete with each other a year from now. . . . We'll beat 'em." The challenge was never accepted.

The basic formula set in 1992 still governs what EAI is paid. Last year, EAI had $5,474 net to spend per pupil - 26 percent more than other city schools. The city would have had to increase the $617 million education budget by nearly $100 million to fund all city schools at the level EAI received, a school system analysis showed.

Dr. Amprey said at the outset that EAI would justify its extra funds by raising new revenue, trimming waste and saving on administration.

For the most part, that hasn't happened.

EAI has won no grants for Tesseract schools nor has it rented out school facilities, as it planned. Neither Dr. Amprey nor EAI can point to major, systemwide savings brought about by Tesseract innovations. Nor did EAI lighten the city's administrative load. Dr. Amprey and his staff spent countless hours working out kinks in the contract.

But Dr. Amprey says the Tesseract experiment has been worth the cost as a model for moving money and authority from the system's North Avenue headquarters to the schools themselves.

"I always wanted to see us move more dollars towards the schools," he said.

Spending changes

EAI, in trimming what it viewed as wasteful and misdirected spending, has significantly changed how dollars are spent at its schools.

The company cut staff, which accounts for three-quarters of a typical school budget. It halved the number of special-education teachers. It trimmed the complement of regular teachers. It replaced unionized teacher aides, who earned $12 an hour in salary and benefits, with a larger group of $8-an-hour "instructional interns."

But EAI increased other expenses. It installed 1,400 leased computers in labs and classrooms. It fixed up school buildings, figuring that investing now will save long-term on maintenance and utilities. It spent $2.8 million in two years for items not usually found in school budgets: lawyers, accountants, travel, Tesseract project staff and consultants.

EAI's spending serves an unusual mix of purposes. Company data show EAI paid $103,000 in 1992-1993 for textbooks and $289,000 for legal fees; $115,000 for heating fuel and $273,000 for executives' and trainers' travel; $125,183 for security systems and $12,192 for rocking chairs, a fixture in Tesseract elementary school classrooms.

The company's staffing changes touched off its first big fight with the teachers union, which accused EAI of saving money at the expense of education.

Mr. Golle says EAI hired interns to provide a second, college-educated adult in every classroom. However, intern turnover is high. Nearly half of those hired last fall had left by March, some to become city teachers.

He says EAI put special education pupils in regular classes because "capable learners," especially black males, were mislabeled as handicapped.

"It has nothing to do with money," Mr. Golle said. "It has to do with what's best for the kids."

However, after a complaint by the union, the Maryland Department of Education found that EAI violated federal rules by "mainstreaming" special education children at Harlem Park Middle School without sufficient parental notice or consent. The company was ordered to give students nearly 137,000 hours of compensatory instruction.

Another union-inspired state investigation found that EAI improperly charged $94,385 in legal fees to federal Chapter 1 funds earmarked to provide extra help to low-income students. EAI has agreed to reimburse the money. The company now operates under state-imposed monitoring of its special education and Chapter 1 programs.

Tale of two schools

At Mary E. Rodman Elementary, a 650-student Tesseract school in a poor West Baltimore neighborhood, each classroom has four computers. The hallways sparkle. Books abound.

The city gave EAI $3.8 million last year for Rodman. EAI spent $2.6 million directly, paid the school system almost $300,000 for central administration - and pocketed more than $900,000 in gross profit, by far the most among Tesseract elementary schools, according to an audited report.

Across town, at Cecil Elementary in East Baltimore, a traditional school about the same size in a similar neighborhood, the city budgeted only $2.5 million last year.

Ms. Coplin, Cecil's principal, said the school needs books and supplies, a furnace capable of heating every room, a security system that deters intruders and a fresh coat of paint.

"There isn't enough here to have a profit," she said. "It's ugly; I don't have all the wonderful things that Tesseract has."

Teacher salaries consumed most of both schools' spending. But at Rodman, EAI also devoted $362,400 to building maintenance and utilities last year, and charged a share of total Tesseract project costs to the school, including $26,591 in travel costs for EAI employees and $18,518 for legal fees. The company spent $94,181 on special education.

At Cecil, where scores are higher and have improved more than Rodman's on standardized reading and math tests, the city budgeted almost three times as much on special education but only $178,640 for maintenance and utilities - about half of what EAI spent.

Of course, there were no out-of-town travel costs, legal fees or profit.

North Avenue debate

Beginning in the summer of 1992, the EAI deal touched off high-level opposition behind closed doors at North Avenue headquarters.

Dr. Amprey often found himself defending EAI against his own staff. Deputy superintendents Lillian Gonzalez and Patsy Baker Black-shear, accountability chief Denise Borders and finance director Judson C. Porter were all sharply critical of EAI at times.

Mr. Porter emerged as the most forceful, persistent critic.

He questioned payments to EAI, pressed the company for more financial information and prepared an analysis that showed EAI was costing the city $4.3 million more the first year than the system had originally budgeted for the nine schools.

Dr. Blackshear jotted on her notes at a January 1993 meeting: "EAI is raising concerns about Judson," according to documents obtained under the Maryland Public Information Act.

In late 1993, Mr. Porter refused to approve an audit of EAI's first-year spending because it wasn't detailed. EAI provides the city one-page summary audits, unaudited spending reports and no school-by-school budgets, which it considers proprietary .

information.

"It seemed to me at a minimum we ought to know at least as much about those nine schools after the contract as we did before," Mr. Porter said in a deposition obtained by The Sun. He was deposed in a Baltimore Teachers Union lawsuit that challenges the legality of the city's no-bid contract with EAI.

Dr. Amprey came to view his staff as defenders of the status quo and EAI as helping him "pierce the bureaucracy." Drs. Gonzalez, Black-shear and Borders all eventually resigned.

After the end of EAI's second year, Dr. Amprey reassigned Mr. Porter, mainly because of the fights over EAI, sources say.

The system hired KPMG Peat Marwick, the accounting firm that works with EAI in the Tesseract schools, to run the finance office for three months. Officials denied charges by union and City Council critics that Peat Marwick had a conflict of interest.

Neither Mr. Porter nor Dr. Amprey would comment on the transfer. But Dr. Amprey confirmed that school finance officials frustrated him.

"They would say you can't [do this] because you can't afford it, you don't have the money to do it. And I wouldn't accept that. It wasn't just with EAI. I think that you can do whatever you want to do and that's your job, to help me do what I want to do," Dr. Amprey said.

"It's just like what I expect a lawyer to do: find out what I want to do and find a way for me to do it legally. That's your job. It's not to tell me what I can't do."

EAI expands its role

Despite the disputes, Mr. Golle tried to better his deal and to expand EAI's presence. He asked for more than he got. But Mr. Golle got Dr. Amprey to pay $684,000 for special education teachers EAI didn't want the first year. He got the city to pay the $45,200 cost of an existing janitorial contract. He persuaded Dr. Amprey, in paying EAI the second year, to provide $1.7 million in city money instead of federal funds that came with restrictions.

Even though he had no test results showing improved student performance, Mr. Golle proposed after a year in Baltimore that EAI manage 11 more city schools. Dr. Amprey publicly called Tesseract "successful enough to expand," but Mayor Schmoke rejected the idea.

Mr. Golle's persistence paid off, though. EAI later won a role in three more city schools, boosting its revenue.

The company became a consultant to Baltimore City College high school and Robert W. Coleman Elementary in November 1993. It assumed management of William H. Lemmel Middle School in March 1994. The value of EAI contracts at all 12 schools is $43.2 million this year.

Mr. Golle also battled over enrollment counts, which mean cash to EAI. By contract, EAI gets to keep most per-pupil revenue even when city enrollment projections are high. Since projections were high two years in a row, this was a boon for EAI. (The deal could benefit the city, too: It would keep most of the difference if projections were low.)

When Tesseract enrollment fell short of projections in 1992-1993, EAI also made a special deal with Dr. Amprey to keep $109,000 of $378,000 it owed the city.

The adjustment was approved by the Board of Estimates, even though the city auditor told the board he found no "adequate rationale" for it.

EAI profits

The Baltimore contract has been crucial both to EAI's bottom line and to its status as the leader among what analysts call "education management organizations."

Until the Baltimore deal provided cash, the start-up company had lived on investors' hopes and piled up $8.8 million in losses from 1986 to 1992. Post-Baltimore, EAI recorded its first annual profit, $1.2 million in 1992-1993. Profits more than doubled last year.

Baltimore also made EAI a hot stock for a time. Even now, Lehman Brothers Inc. rates it as a "speculative buy" in "an industry on the verge of taking off." The company raised $31 million in fresh capital after getting the Baltimore contract.

EAI's stock price, which dipped to $7 in May 1992, hit double digits after the Baltimore deal, doubled to $22.25 in May 1993 and peaked at $48.75 a share in November 1993.

By the next month, after the Baltimore Teachers Union sued EAI, the volatile stock had slid to $31.50. It continued to decline as new business was slow to develop. It closed Friday at $11.

As its profits increased, the company stepped up its cross-country search for new clients - from Washington, D.C., and Pinckney, Mich., to Pulaski County, Ark., San Diego and beyond. It won its second big contract in Hartford, Conn., in October.

EAI has used Baltimore employees to present the Tesseract Way to potential customers. Dr. Amprey praised EAI in Hartford and Napa Valley, Calif., where he was flown at company expense. The company sent a Baltimore principal to lobby school officials in Honolulu.

Investors who bought the stock early, including Mr. Golle and other executives, were rewarded when their stakes quintupled in value.

But Mr. Golle, an energetic entrepreneur who founded a successful educational training company in 1970, bristles at the criticism that he is getting rich at Baltimore's expense.

"I didn't do this to get rich. I was rich," he said.

Mr. Golle says his net worth is "in eight figures," or more than $10 million. He owns homes in Minnesota and Arizona, and jets around the nation, linked by pager and cellular phone to his Minneapolis base.

The EAI chairman said his "meager salary" of $137,000 a year represents a substantial pay cut from his previous career. He calls company officials "dramatically" underpaid. William F. Goins, EAI's No. 2 executive, makes the most - $300,000 a year.

The company offers executives stock options in lieu of higher pay.

Mr. Golle has sold 175,000 shares of EAI stock since 1992, much of it options exercised at $1 a share and sold at $12 to $38 a share. Pretax profits were about $2.5 million. He filed May 23 to sell 25,000 more shares. He has given away 91,500 shares to relatives and charity.

He also owns EAI stock valued at nearly $5 million, with options and warrants to buy more than half a million additional shares.

But Mr. Golle, who says he invested $3 million in the company, said: "I still have not shown a profit on my investment in EAI."

Derided by opponents as a smooth-talking, bottom-line businessman, Mr. Golle depicts himself instead as the misunderstood founder of a misunderstood industry.

"God, I never worked so hard in my life," he said. "I've never been subject to personal criticism like this ever before. My motives are questioned and - how do you tell people - I'm doing this for the kids."

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