Woes growing, educator's fate in the balance

THE BALTIMORE SUN

There's a framed cartoon in the corner of Christopher H. Whittle's Midtown Manhattan office that pictures a man in a business suit sitting expectantly before a fortuneteller and her crystal ball.

"Why ask me what's going to happen?" the fortuneteller says. "Ask Chris Whittle."

The founder and chief executive officer of Edison Schools Inc. does see himself that way -- as a kind of entrepreneurial seer. But some say the gap between how Whittle envisions his company's place in American education and the reality of Edison's performance in the complex and frequently politically charged world of public schools is widening.

The country's largest for-profit school management company, with 150 schools, Edison says it can educate children -- particularly in underperforming schools -- more effectively and for the same amount of money as traditional public school systems.

But the company is increasingly under fire as an educational as well as a business enterprise. Several of its client schools have abandoned it over academic performance, cost or both. And investors have fled in droves, pushing its stock price down to pennies. Even the resilient Whittle, who has survived other education-related business failures, has referred to the past year as "traumatic" and said the company needed a "corporate gut check." Edison faces one of its most important -- and difficult -- tests: the transformation of 20 failing schools in Philadelphia.

Despite its mounting troubles, Edison opened the academic year running more schools than ever, including three in Baltimore under a contract with the Maryland State Department of Education. Those schools, in their third year under Edison's management, have shown significant improvement in some areas and less impressive gains in others.

Whittle, who burst onto the public scene more than 20 years ago when he bought Esquire magazine, remains optimistic that his model for education -- small, orderly learning environments and an emphasis on basics such as reading -- works. He calls speculation that Edison was headed toward bankruptcy last spring overblown. And he predicts that a number of cost-cutting measures -- including the letting go of dozens of employees at company headquarters in New York -- will help Edison reach its first profitable year in the next fiscal cycle.

Still, the list of problems the company faces is daunting:

Edison has lost several contracts this year alone, including most recently one with Dallas, where it runs one of its largest clusters of schools. Complaints from former Edison clients have ranged from lagging test scores to unexpectedly high costs.

The U.S. Department of Education has launched an investigation into how Edison was awarded its five-year $60 million contract to manage schools in Philadelphia. Democratic U.S. Rep. Chaka Fattah has asked federal officials to investigate whether the company "improperly conspired" with the state to "corrupt" the contracting process. A separate $2.7 million contract awarded to Edison last year without bids is also being investigated.

Edison's market value has gone from more than $1.5 billion 1 1/2 years ago to about $20 million today, and the company could be delisted from the Nasdaq stock exchange because its shares have been trading below $1 for more than 30 days. A recent warning gave the company 90 days to raise its stock price.

The Securities and Exchange Commission found in an informal investigation earlier this year that Edison had misled investors by improperly reporting as revenue money it never received, such as teacher salaries paid directly by school districts. Edison settled the case in May, agreeing to change its accounting methods, but faces several class-action shareholder lawsuits.

"They've still got a lot to prove that they're better than their counterparts in the traditional public school sector, and they've still got a lot to prove to Wall Street that they're a going concern," said Peter J. Stokes, executive vice president at Eduventures, a Boston-based education-research firm. "They're in a 'prove it' situation right now, and they really can't afford any more massive publicity disasters."

In the end, the company's future may hinge in large part on its performance in Philadelphia, where it is overseeing the education of about 13,000 students, nearly twice the number in any other district.

The Philadelphia deal has been a mixed blessing. Edison had hoped for and led Wall Street to believe that it would have a much larger presence there -- managing 45 schools. Investor disappointment after the company was awarded only 20 sent its stock plummeting from $12 in April to a record-low 22 cents in mid-August. The stock closed at a high of $36.75 in February 2001.

"If Edison does a great job, guess what? That's the best advertising they can have," said James E. Nevels, chairman of the Philadelphia Reform Commission, which hired Edison and six other outside providers to help improve the troubled school district, beginning this year. "The bottom line is: All eyes are on them. The expectation of future success -- or failure -- may reside in how well they do here."

The 55-year-old Whittle, who speaks with a faint Tennessee twang and favors bow ties and sweater vests, has seen other business ventures sour. In the mid-1990s, he was pushed out as head of his company Whittle Communications, which was hemorrhaging money. His now-defunct in-school television network, Channel One, was later criticized for commercializing American classrooms.

Whittle considers Edison his most important project to date. In an interview last month in his airy Fifth Avenue office, during which he sat relaxedly behind a conference table and toyed with a Slinky, he said he welcomes the spotlight on his schools because it brings accountability. All public schools, he said, should be so closely watched. But he called Edison "severely misunderstood."

What's being tested, as Whittle sees it, isn't private vs. public management -- a polarizing issue in the debate over how to improve ailing public schools -- but whether a large-scale, national system of schools can bring advantages in school design that smaller local systems can't. "I think in that arena, good ideas win out," he said. "And I think that the ideas are bigger than the people and the companies involved."

The question is how long Whittle's investors will continue to back his ideas with their dollars -- as they did last spring with a $40 million loan to keep the company afloat.

"The man is a visionary. The man has gotten things done that no one ever thought he would get done," said Jeff Silber, an education industry analyst at Gerard Klauer Mattison, who nevertheless has not recommended Edison's stock for months. "But it comes to the point where you have to set realistic expectations -- at least for Wall Street's purposes."

Growth and problems

Named after Thomas Edison, Whittle's company was founded as the Edison Project in 1992. Whittle initially envisioned a national network of private schools -- 1,000 of them, with about 2 million students, by about the year 2000 -- as an alternative to failing public ones. He later changed course to his current strategy, seeking partnerships with existing schools and charter school start-ups.

Edison has grown quickly from four schools in 1995 to 150 this year (the company counts a school serving elementary- and middle-school children as two schools rather than one even if they are in the same building). It operates in 23 states and the District of Columbia, enrolling 84,000 children -- compared with 93,000 in Baltimore. While most Edison schools look much like public schools anywhere, one signature is the eight "core values" that are posted in hallways and classrooms: wisdom, justice, courage, compassion, hope, respect, responsibility and integrity.

Although Edison says it has renewed contracts with 15 of 19 clients, none of its first schools is under its management, and nine contracts have been ended before they were scheduled to expire.

District officials in Sherman, Texas, about 65 miles north of Dallas, called Edison's tenure from 1995 to 2000 one of "broken promises, poor performance and agreements violated" and said they spent $1 million more a year on Edison schools than on their regular ones.

Edison and the Mount Clemens, Mich., school district recently parted ways amid a payment dispute.

The board of directors at the Boston Renaissance Charter School decided to end its contract with the company in June, three years early.

The news worsened last month. A week after the Bibb County, Ga., school board voted to take back two Edison schools two years early, school officials in Dallas -- where the company has a $39 million contract -- took similar action. The Dallas school board voted unanimously to fire Edison after this academic year, saying the privately run schools have not outperformed district-run ones and are prohibitively expensive.

John E. Chubb, Edison's chief education officer, said before the Dallas vote that the situation there is driven by politics and that it shouldn't be a "horse race" of which schools are doing better.

"It's a very awkward situation for us as a provider," said Chubb. "Basically, winning makes you unpopular, and losing makes you unpopular. The idea is that this is a partnership. It's all the same district, and it's their schools. ... The important thing for school districts is that kids are moving forward."

Company officials say Edison chose to end some of the contracts early for financial or other reasons. But the company has also been hampered by deals it couldn't close.

Edison was rebuffed in New York City last year after parents voted overwhelmingly against letting it run five schools. The Austin Independent School District in Texas received a proposal from Edison in December to run up to 15 schools but decided not to hire the company because it found Edison's track record to be inconsistent.

Success in Baltimore

In its defense, Edison holds up its work in Baltimore as one of its success stories. Frustrated by a lack of academic progress, the state board of education took over three failing city elementaries -- Furman L. Templeton, Gilmor and Montebello -- in 2000 and gave Edison a five-year contract worth about $15 million annually to run them.

All three schools made significant progress on national reading and math tests last spring, in some cases doubling or tripling their scores. Results on the 2001 state exams were far less impressive -- except at Montebello, which is headed by a former city principal known for turning around troubled schools.

Maryland Superintendent Nancy S. Grasmick praises Edison for its emphasis on instruction, individual student tracking, parent outreach and professional development for teachers. She attributes the program's success in Baltimore in part to a contract with strong accountability standards and state officials' diligence monitoring it.

"We held their feet to the fire, and they said, 'Do it; hold our feet to the fire,' " Grasmick said. "I have to say, whenever we raised issues and concerns they were extremely responsive, and we feel that they have transformed those schools."

However, many city school board members have openly criticized the state's arrangement with Edison. They say the company gets more money per pupil -- which the state and Edison dispute -- and has tried to weed out, in the words of board member Kenneth A. Jones, the "difficult and expensive" students, a charge the company also faced in San Francisco.

But many local parents say their children have made marked improvement -- academically, socially and otherwise -- under Edison. Those parents turned out in large numbers last spring to support an Edison middle school, saying they didn't want to send their children back to regular city schools. City school officials, however, said no.

Baltimore's last experiment in school privatization, with Education Alternatives Inc. in the mid-1990s, was widely considered a failure. After 3 1/2 years, city officials ended the contract early amid declining test scores and complaints about cost. Education Alternatives, which was renamed the Tesseract Group, was later delisted from the Nasdaq and filed for bankruptcy last year.

There is concern from some schools and investors that Edison might be headed for a similar fate. Last spring, it was feared that the company was on the verge of folding because it lacked the capital needed to open its new schools. But Whittle wiggled out of the jam -- he says he never doubted that he would -- announcing in June that the company had arranged to borrow $40 million.

The deal was not without wrinkles. The original package included financing from Merrill Lynch & Co. Inc. and Chelsey Capital, a small private investment firm in New York. But Chelsey was later replaced -- unexpectedly and without explanation -- by a new funding source with ties to two Edison board members.

Philadelphia effort

Edison will be put to its most important test in Philadelphia -- where some city officials, parents and the powerful teachers union have been hostile to the reform arrangement for months. The Philadelphia congressman, Fattah, has emerged as one of Edison's most vocal critics. He says that Whittle is trying to exploit children in the name of profit and that the company has inflated its claims of success along the way.

"It's like the snake-oil salesman going from town to town to sell something that promises to fix all of your ills," he said. "They will sell you anything you're willing to believe, until it's time to deliver."

Edison's five-year contract in Philadelphia requires annual improvement on test scores, including in the first year. But it can be voided at the "convenience" of the School Reform Commission -- a provision members felt would allow maximum flexibility if the partnership was not working out.

The success of Edison's academic program will be decided in the classroom. Jan Solkov, the new principal at Morton McMichael Elementary, an Edison-run school of 550 children in West Philadelphia that serves a public housing high-rise across the street, said she doesn't pay attention to headlines about Edison's woes.

"I pretty much turn away from them because they don't speak to me about what Edison is all about," said Solkov, 50, several weeks before the school year began.

Edison says its schools' performance on state and national tests speaks for itself. But some educators and researchers say that the company's statistics are often misleading and that its claims sometimes do not hold up.

For instance, Gary Miron of the Evaluation Center at Western Michigan University said the company's claim that its schools are improving more quickly than the 50 largest school districts' isn't valid because the method used to reach that conclusion is "totally ridiculous."

The company compared schools in different states with different tests -- in different years.

"I think that they would get a better sample by taking the first 50 districts in the country in alphabetical order," he said. "It makes as much sense as taking the 50 largest districts when they do not match state test and do not match test year."

Miron co-wrote a study published in December 2000 that tracked Edison's progress in its first 10 schools. That study, which was funded in part by the National Education Association, found that Edison schools perform at levels similar to -- or worse than -- their district-run counterparts but not as well as the company says.

At the time, Edison called the report "predictably biased," "stunningly irresponsible" and a "sham." The NEA and other teachers unions are traditionally hostile to for-profit school operators.

Edison has commissioned the RAND Corp., a public policy research outfit, to study its performance, but that review won't be complete for several years.

Miron said he has had trouble getting data from the company to support some of its claims.

"If it's not verifiable, if it's not replicable, this is not research, it's marketing," said Miron. "You can't just come out and say, 'This is the number one toothpaste.' "

Whittle's detractors say that his expectations are too high for his own good and that everything isn't as grand as he says it is -- or wishes it to be. And he pleads guilty, to some degree, to that charge.

"Can I get ahead of myself? Sure. Can I overreach? You betcha," said Whittle. "Part of this is letting that horse run wild at certain places and reining it in, in others and trying to find the balance in that."

"There have been plenty of tough years in Edison's history," he said. "I saddle back up and go, 'All right, here we go again.'"

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