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EAI's future at stake in 2 decisions Education firm faces Hartford election, money pressures here; Stock plummets; Baltimore would cut $10 million from payment to company


Education Alternatives Inc., the company managing nine Baltimore public schools, faces two crucial dates this week and next that could determine the future of the company -- and of the privatization experiment.

EAI is scheduled to respond Thursday to Baltimore's demand for a $10 million reduction in this year's payment -- nearly 25 percent of the estimated $44 million contract.

Five days later, voters in Hartford, Conn., the only other city where EAI manages public schools, will elect five members of a nine-member school board. An anti-EAI slate could win a board majority.

Both events will be closely watched nationally because EAI is the largest company attempting to couple private enterprise and public education in troubled urban districts.

EAI this month reported a loss of $7.4 million in the fiscal year ended June 30, and its stock has plummeted from a high of $22 a year ago to $7.50 Friday. Even analysts normally friendly to the company last week were warning investors to be cautious.

"A lot depends on how much is dictated to EAI by the city of Baltimore and how much is negotiable," said Michael K. Sabbann, an analyst for Piper Jaffray Inc. of Minneapolis, which deals in EAI stock.

William R. Brown Jr., city finance director, said the $10 million cut was contained in a written "final offer" to EAI, and Mayor Kurt L. Schmoke told reporters Thursday and cheering members of the Baltimore Teachers Union (BTU) on Friday that there would be "significant reductions" in the EAI contract, part of the city's effort to eliminate a school budget deficit.

"Even mayors get tired of being kicked around," Mr. Schmoke said, referring to his controversial decision to extend the EAI contract for a fourth year after receiving a lukewarm evaluation of the program from the University of Maryland Baltimore County.

EAI would not say whether it could -- or would -- accept the reduction. The company issued a statement saying it would "explore every avenue to insure that the contract we have with bTC Baltimore City is beneficial to both parties," but officials would not be interviewed.

City school officials, meanwhile, have drawn up contingency plans for resuming management of the nine original EAI schools and three others where the company provides noneducational services. Picking up EAI's computer leases and other expenses would cost about $3 million, one source said.

In Hartford, where EAI is under contract to manage the entire $200 million budget and all 32 schools, starting with six this year, the company has charged the city for nearly $4 million in services, including numerous trips by EAI officials between Minneapolis and Hartford. Hartford officials say they shouldn't have to pay anything.

Nearly a year into the contract, EAI has not taken over the budget, and city officials refuse to sign documents saying the city is managing the budget on behalf of EAI. The company may have to pull out of the contract if it cannot "resolve certain contractual issues," it said this month in its annual filing with the federal Securities and Exchange Commission.

In the complex Hartford school board election, four pro-EAI candidates and six anti-EAI candidates survived an Oct. 17 primary, setting the stage for the election Nov. 7, when five members will be elected to the nine-member board. Two EAI supporters and two opponents will remain on the board with the five new members.

"EAI's problem is that it made so many promises it simply couldn't keep," said Elizabeth Brad Noel, an anti-EAI board member not up for re-election. "Many of their promises concerned me because I could see us owing our lives to the company store."

Mr. Sabbann, the analyst, said he still has faith in EAI's long-term viability. "This is a well-run company with a unique approach to solving some of the ills in public education," he said.

The Minnesota company, however, has failed to expand to school districts beyond Baltimore and Hartford. In Washington, community opposition blocked Superintendent Franklin L. Smith's attempt to hire EAI, though the school board has given schools authority to negotiate management contracts.

Some already have given up EAI for dead. "I say good riddance," Albert Shanker, president of the American Federation of Teachers, said Friday in Baltimore, where he was addressing BTU members. "I liked what they were saying at first, but they tried to do too much too fast. In the end, they didn't have an education program. They were pigs."

EAI won the five-year Baltimore contract in 1992 and set out to establish its Tesseract program in eight elementary schools and Harlem Park Middle School. The program involves a rearrangement of the traditional school day, a college-educated "intern" in each classroom and daily drills on computers. The company cleaned up the schools and equipped them with rocking chairs, colorful rugs and telephones.

Robert C. Embry Jr., president of the Abell Foundation in Baltimore and former president of both the state and city school boards, said EAI "never delivered academically. The experiment's been flawed. Maybe they took on too many schools, maybe they weren't given the authority they needed to run the schools. For whatever reason, it hasn't worked."

"The EAI story isn't a good one," said John McLaughlin, an education professor at St. Cloud State University in Minnesota and editor of Education Industry Report, a publication that keeps track of the school privatization movement. "You wouldn't want to be an investor in the company right now."

But Dr. McLaughlin said that privatization of education is proceeding robustly. Companies such as Columbia-based Sylvan Learning Systems have successfully entered the public school arena, he said.

"I wouldn't count EAI out just yet," he said. "A year ago, everyone was saying the Edison Project [another company competing to manage public schools] was on the mat, but this year it's stronger than ever. If EAI folds, it will have soured the water but not poisoned the well. The education industry will take notice, but it will definitely move on."

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