Privatization thriving

IN SOUTHWEST Baltimore, there's a one-room storefront school whose program is aimed at chronic truants and teen-agers in danger of failing.

It's a public school run by Ombudsman Educational Services, a for-profit Illinois company operating in nine states and about to expand in Baltimore to two new sites on St. Paul and Cathedral streets.


"We don't do anything better; we just do things differently, and more efficiently," James Bryant, the company's operations manager, said yesterday.

Such a modest statement would not likely spring from the lips of John Golle, chief executive officer of Education Alternatives Inc., the for-profit company managing nine Baltimore schools.


But EAI is not like Ombudsman and most of the dozens of other companies that are finding niches in American public education. EAI boldly tried to manage entire schools, and in the case of Hartford, Conn., an entire district.

Ombudsman, which serves "at-risk" students at a cost for each student considerably less than that of the Baltimore school district, did not have to sell itself to political powers when it quietly set up shop three years ago near the B&O; Railroad Museum on Pratt Street.

It had a proven track record; EAI did not. It had a built-in plan of evaluation; EAI did not. It had financial support from the Abell Foundation; EAI did not. It did not have to deal with a rancorous Baltimore Teachers Union; EAI did.

Today, EAI's future is clouded. Company officials are to meet Friday with Baltimore officials who want to cut $10 million from this year's $44 million city payment. Meanwhile, a school board election in Hartford on Tuesday could result in an anti-EAI board majority. That could spell more trouble for the super-salesman, Mr. Golle, who is working desperately behind the scenes to minimize the damage in Baltimore and survive in Hartford.

If EAI were to fold, John McLaughlin, editor of Education Industry Report, a Minnesota publication that keeps tabs on the education "industry," predicts the privatization movement will hardly be affected.

"If EAI should fold its tent and walk away," says Mr. McLaughlin, "the industry will take note but will definitely continue."

The companies that are doing well, Mr. McLaughlin says, are those that have found a niche like Ombudsman (ironically named because it is an advocate for kids who face huge school bureaucracies); Berlitz Language Centers, which is aggressively marketing its foreign language instruction; and Sylvan Learning Systems, the Columbia-based tutoring and testing company.

Many of the most successful companies in the thriving education industry, Mr. McLaughlin says, are "at either end of the K-12 spectrum" -- that is, preschool or post-high school. One of the largest providers of college education to working adults is the profit-making Apollo Group, of Phoenix, Ariz., which has an enrollment of 36,000 at 65 campuses in 25 states. But most Americans have never heard of this college -- listed on the Nasdaq stock exchange.


Sylvan entered the public school market in Baltimore only three years ago, and already about 20 percent of its business derives from school contracts, according to analysts. Much of its revenue comes from Title I, the federal government's major anti-poverty education program.

Thus far, Sylvan has gotten good test results from its Baltimore tutoring centers, but Douglas Becker, the company president, keeps hearing the same question: "Why can't the school system do the same thing with its own computers and teachers, thus saving the profit Sylvan takes away?"

"Because," he says, "the school system is trying to address every student with every need. We're specialists, assigned a specific subgroup targeted for us. Like any specialist, we have the tools and the resources the school system doesn't have. And we have a different cost structure. We charge less than what it would cost the school system to do the job itself."

And still make a profit.

EAI includes as revenue Hartford school budget

When Education Alternatives Inc. filed its annual financial report to the federal Securities and Exchange Commission last month, it showed company revenues increased from $34 million in 1994 to $214 million in the fiscal year ended June 30.


Not bad for a company with 150 employees and major contracts in only two cities, Baltimore and Hartford.

But wait a minute! What the company did was count as revenue all of the Hartford school budget, of which it has yet to manage a dime. Hartford officials maintain EAI must set up a system to manage the budget before it can count it as revenue.

EAI's counting of "pass-through" money as revenue is apparently legal. But some beg to differ. "I'm absolutely baffled how an amount allocated by the state to pay for children's education becomes the revenue of a consulting firm providing guidance over how that money should be spent," said Howard Schilit, an American University professor and author of the book "Financial Shenanigans: How to Detect Accounting Gimmicks and Fraud in Financial Reports."

If EAI were hired to manage New York City's budget, Dr. Schilit asked, "Would it become a billion-dollar company overnight? Revenue should be what you earn by the service you provide."

EAI has its defenders. "When it all shakes out," said Michael K. Sabbann, analyst for Piper Jaffray in Minneapolis, "the bottom line is the same. It's an honest net profit or net loss, and that's the way EAI is expressing it."