For Profit Schools

They're spreading fast. Can private companies do a better job of educating America's kids?

Leonard Mayo was at his wit's end. The public school where his son Joshua attended second grade was one of Philadelphia's best, but Joshua hated it. "He was not being challenged, and when my wife Lisa and I would ask about after-school activities or a gifted and talented class, the teacher would say there was nothing," says Mayo, 30. In despair, the couple looked at private schools and found a first-rate one nearby. But the $10,000-a-year tab was daunting on Mayo's salary as a telecom company account executive. And Joshua's brother, Jared, then 4, would start school as well in another year.

The couple had just decided to make the sacrifice when they heard about a school in nearby Bensalem that promised the best of both worlds: a high-quality education usually found at private school but at no cost. Something called Mosaica Academy Charter School was set to open in

September, 1998, a strange hybrid that was publicly funded, and therefore free, but run by a private, for-profit company called Mosaica Education Inc.

The place itself hardly looked innovative--it was housed in an abandoned, 60-year-old public school--but it had jettisoned many of the trappings of public schools. Starting in kindergarten, Mosaica students use the company's proprietary curriculum, which immerses them in the development of civilizations over four millennia. There is no teacher's union, the school day is almost two hours longer than at the public school, and the academic year is 20 days longer. The school had no track record yet, but intrigued, the Mayos took the plunge and enrolled their sons. Today, two years later, "Joshua is learning things in fourth grade that I was learning in eighth grade," says Leonard. Mosaica's fourth-graders advanced twice as much on national tests as the national norm last year, and the 500-student school has a waiting list of 400.

Mosaica is a harbinger of what proponents believe will be a revolutionary force in U.S. education: for-profit companies that run publicly funded schools. In the past few years, more than a dozen new school-management companies have sprung up from nowhere (table). They offer widely differing approaches, but all promise to make a buck while doing something that 15 years of school reform has largely failed to achieve--namely, better educate America's children.

GROUND FLOOR. Right now, for-profit schools are just a blip on the screen: They teach some 100,000 students at about 200 schools out of America's 53 million children in kindergarten through 12th grade. But they're growing faster than a hungry 2-year-old. In two years, Boston-based Advantage Schools has shot from $4 million in revenues to $60 million. In the five years since it opened its first four schools, Edison Schools Inc. has jumped from $12 million to $217 million in revenue. It now runs 79 schools in 16 states.

Advocates have even grander visions of the future. By 2005, New York-based Edison Schools alone will be managing 423 schools with 260,000 students, giving it revenues of $1.8 billion, predicts Michael T. Moe, analyst at Merrill Lynch & Co., which helped Edison raise $122 million in an initial public offering last November. By 2009, for-profits could capture as much as 10% of the $360 billion the U.S. now shells out annually on K-12 schooling, estimates Moe. Proclaims Edison founder and CEO H. Christopher Whittle: "In 20 years, 20% to 30% of U.S. public schools will be run by for-profits."

If even half of these claims come true, it would dramatically reshape U.S. education. Years of reform efforts have wrung change from the public schools, but it has come at a glacial pace. If for-profits turn out to be a viable alternative, they could begin to give parents real school choice for the first time, accelerating the pace of progress.

Big-name investors are subscribing to this vision, lured by the prospect of getting in on the ground floor of an entirely new industry. From J.P. Morgan and Fidelity Ventures to Paul Allen's Vulcan Ventures, a host of backers are sinking millions into the new school companies in the belief that for-profit education is poised for explosive growth. "This is a breakthrough business opportunity," declares Michigan industrialist J.C. Huizenga, who has invested "upwards of $50 million" in National Heritage Academies. Adds Legg Mason Inc. analyst Scott Soffen: "In the near term, you're going to see growth not unlike the Internet."

What's driving the fervor is the belief that competition--driven by the profit motive--can deliver the quality education so many American parents are clamoring for. "We're on the brink of fundamental change," declares former U.S. Education Secretary and onetime Republican Presidential candidate Lamar Alexander, who is on the board of Leeds Equity Partners III, an investment fund specializing in emerging education companies.

STRUGGLES. Despite the almost-messianic rhetoric, though, it's far from clear that for-profit schooling will live up to expectations. Indeed, the companies make dramatic claims. Edison and Advantage both pledge to have most students eventually doing college-level work by the 11th grade. But so far, students at some of these schools are still performing poorly on tests. And because many schools have been open only a year or two, "the jury is still out on whether they improve academic achievement" in the long run, says Brookings Institution education expert Tom Loveless.

The very idea of making money from educating schoolchildren also raises hackles. The education Establishment argues that many goals of public education will be compromised by companies whose primary motive is a quarterly profit. Already, they cite examples of for-profits cutting extracurricular activities and turning away the severely disabled. "Educating children is very different from producing a product," argues Bob Chase, president of the National Education Assn., who predicts that for-profits may be just another school reform "fad du jour."

Even the mainstream business community is largely skeptical. Groups such as the Business Roundtable have stayed focused on trying to improve public schools from within, while well-known CEOs, like IBM's Louis V. Gerstner and Boeing Co.'s Phil M. Condit, have thrown their clout in with the nation's governors to set high new standards for student achievement. It's not so much a political stance as a practical choice; under even the most optimistic scenarios, public schools will educate 70% to 80% of Corporate America's future workers for the foreseeable future. With the New Economy already sending companies scrambling for skilled workers, corporate leaders figure they had better try fixing public education first.

Nor have for-profits yet proved that they can make real money. Their basic contention is that public schools have built up a tremendous bureaucratic overhead that can be dramatically slashed. But so far, few companies are profitable. Edison, which in fiscal 1999 lost $49 million on revenues of $133 million, has seen its stock slump nearly 25%, to 14, since its November IPO. And on Jan. 3, Scottsdale (Ariz.)-based Tesseract Group Inc.--which pioneered the concept of for-profit public schools in 1990, when it was known as Education Alternatives Inc.--said Nasdaq was threatening to delist its shares. The company is trading for less than 1, down from a 1993 high of 49, after large losses.

Still, despite the obstacles, for-profits may have come along at just the right time to have a shot at success. Poll after poll shows that education is a top concern for Americans. It's little wonder why. In December, the National Education Goals Report conceded that the U.S. has fallen far short of the aims governors had set a decade ago for 2000. The high school graduation rate hasn't improved at all. And U.S. 12th-graders came in 15th out of 20 developed countries on international math tests, and 12th in science. No surprise that many parents are ready to try almost anything not run by the local school bureaucracy.

GUINEA PIGS. Such concerns have opened the schoolhouse door to profit-making education companies. In response to parental demand for more choice, the states have created charter schools, which are typically started by groups of parents and teachers. They apply for a charter, usually issued by a school board, university, or state agency, and receive tax dollars, but they may then operate independently of the rules that govern most public schools. Charters draw little of the political controversy that is sparked by vouchers, another school reform program that gives parents public money to help send their children to private schools. Minnesota passed the first charter-school law in 1990, and the concept has now spread to 36 states. The number of charter schools has soared to 1,700 from fewer than 100 in 1994; it will reach 3,000 by 2002, according to U.S. Education Secretary Richard Riley.

The charter school movement, in turn, has fueled for-profits. The first for-profit contracted directly with a school district when Dade County, Fla., hired Educational Alternatives, now known as Tesseract, in 1990 to operate a troubled Miami public school. Soon, the company won new contracts in Baltimore and Hartford. But after repeated clashes over everything from funding to hiring, the contracts were canceled. "We were the guinea pigs who showed what wouldn't work," recalls Tesseract Chairman John T. Golle.

So far, for-profits are proving adept at marketing to dissatisfied parents. Advantage lures desperate urban parents with school uniforms, strict discipline, and a rigorous curriculum that tells teachers exactly how to teach each lesson. "Their philosophy was exactly what I wanted," says Darlene Vandreuil, whose two children attend Advantage's Abbey Kelley Foster school in Worcester, Mass., where students take Latin beginning in the third grade.

By contrast, Beacon Education Management's middle school in Chelmsford, Mass., is geared to a suburban clientele. It aims to stimulate students to think by scrapping most textbooks in favor of hands-on projects. Recently, students studied a nearby lime quarry, learning to survey it and prepare detailed maps.

"FIRST-RATE." Edison has the most comprehensive approach. The company made a splash in 1992 by hiring former Yale University President Benno Schmidt Jr., now Edison's chairman, to lead a $40 million, three-year effort to develop its program. Edison's schools combine challenging curriculums--such as the highly regarded Success for All reading program--with a rigorous schedule that keeps kids in class 28% longer than the average public school. Starting in third grade, students are given a computer and modem to take home, so they can use "The Common," Edison's intranet, which features a virtual library and other resources. "Edison is a really first-rate company," says Deputy Education Secretary Mike Smith.

Because for-profits are still public schools, some of the experimenting has led to politically charged confrontations that true private schools don't encounter. For example, Michigan-based National Heritage Academies (NHA) is appealing to parents with discipline and traditional values. Every month, students study a different virtue, such as generosity, prudence, and fortitude. Many parents love the results. "This is like the school where I went; it's safe, it's wholesome, there's a healthy atmosphere," says Kim Vander Sluis, a stay-at-home mom with two children at NHA's Vanguard Charter Academy outside Grand Rapids, Mich.

But other parents see a religious school that has no right to taxpayer dollars. For Jeff Seaver, a parent with two kids at Vanguard, the last straw came when he attended a school "moral focus retreat" at which a Baptist minister delivered what he describes as a revivalist sermon. Seaver is now suing NHA for violating the Constitution on church-state grounds.

MULTIPLY THIS. For-profits are also tearing up the rule book on hiring. Michigan's largest for-profit, Leona Group, tapped a former General Motors Corp. marketing manager, Rod Atkins, to be principal of its Voyageur Academy, a Detroit elementary school. Atkins got the job after serving on the school's board, which includes managers from GM and Ford Motor Co. He has no previous teaching experience and hardly acts like a traditional principal. Last year, he fired a kindergarten teacher for poor performance, which almost never happens in unionized public schools. And after discovering many kids were having trouble with multiplication tables, "we decided to put everybody in lockdown from 3:30 p.m. to 5 p.m." for additional work, he says. When parents arrived to pick up their kids, Atkins told them to come back later. They said "fine," he recalls.

Most for-profits claim such methods are producing impressive results. "After one year, we're showing 10% to 15% gains" on student test scores, says Advantage CEO Steven F. Wilson. National Heritage says its students have been advancing the equivalent of 1.4 grades in a year. Some educators remain dubious. "Each of these developers pulls out its best school and says that's what is happening," says Harry Levin, director of the National Center for the Study of Privatization in Education at Columbia University's Teacher College. Until rigorous studies are done over more time, he cautions, such claims can't fairly be judged. Still, many educators concede that parents often are more involved in for-profit schools, something studies show is key to improved performance.

Of course, for-profits can't solve all of the obstacles that can be thrown in the way of learning. The problems plaguing many U.S. schools go way beyond the classroom. Despite all the public concern, most students in affluent and even many middle-class areas get a reasonably good education. The real disasters lie in urban areas, especially low-income ones. Better teaching methods and fewer bureaucrats won't necessarily overcome the difficulties students bring to school from drugs, crime, and broken homes. For-profit schools face "the same kind of problems as public schools in very tough areas," says American Federation of Teachers President Sandra Feldman.

The challenge for the private companies is that parental demand for choice is the most urgent in the worst-off schools. Initially, critics feared that for-profits would try to "cream" the best students away from public schools. But that hasn't happened. In the suburbs, parents already pay a housing premium in areas with good schools. But in the big cities, parents are screaming for options. "That's why Advantage is going exclusively after the urban market," says CEO Wilson.

BETTER PAY. Another rap against for-profits: inexperienced teachers. Despite the stock options and merit pay that many for-profits offer teachers, the companies often pay less than public schools, where low salaries have long impaired recruiting. Take Edison's Boston Renaissance, a K-8 school that serves 1,150 mostly low-income, minority youths in Boston. When it opened in 1995, "we started with a significant number of inexperienced teachers," many of whom soon left, says David Knapp, chair of the school's board. And while Edison sent students home with computers, "people didn't know how to use them, and they lived in areas where there's vandalism and theft, so only one-third were returned," says Tom Wesner, a private-school principal who taught at Renaissance for three years. By 1998, most of the school's students were failing the state math test.

That year, Edison brought in Roger Harris, a respected Boston middle-school principal, to run the place. To help recruit experienced teachers, Harris shortened the school year to 191 days from 205, boosted salaries by 7%, and begun offering multiyear contracts--all moves, ironically, that make it more like a public school. Teacher turnover has dropped, and test scores have begun to improve.

Posting profits, though, is still a problem. Many for-profits charge hefty management fees, about 12% of a school's revenues in the case of Philadelphia's Mosaica, for example. To cover the fee and still run the school, they expect to spend less on administration. Sure, public schools are less efficient than Corporate America, but "claims that half of school spending is wasted on administration is hyperbole," warns Edison's Whittle. He figures the average district spends about 27 cents of every dollar on its central office. As Edison expands, Whittle says economies of scale will help him slice that to just 8 cents. In Edison's case, most of the savings will be plowed back into the classroom. That would leave Edison with a slim 7% profit, concedes Whittle, who is counting on explosive revenue growth to fuel Edison's stock.

But this model allows no funds for building new schools. Whittle figures such capital costs can eat up 20% of the annual funding for-profits receive. Typically, for-profits get the same per-child operating budget as public schools but no capital funding. To cope, many use buildings public schools would never consider. Advantage's Abbey Kelley Foster school, for one, is housed in an old tool-and-die factory, which cost Advantage just $2.5 million to refurbish.

HIGH HOPES. Charter Schools USA, just two years old, is pioneering what CEO John Hage calls "second-generation charter schools" that rely on clients to pay for school buildings. Ryder Systems Inc. agreed to pay $4 million to build Charter's new elementary school, which opened last fall across the street from the trucking company's South Florida headquarters. In exchange, the children of Ryder employees get preference. Ryder CEO M. Anthony Burns says the school is a way to make Ryder "a preferred employer." The problem: The scheme only works because Florida law allows the school to give Ryder employees first crack at slots in the school. Not all states do. And the idea could prove controversial, since it amounts to private parties buying rights to attend a public school. Ultimately, the growth of for-profits could be stunted unless politicians were willing to give them access to taxpayer-backed bonds and other capital sources enjoyed by public schools.

Meanwhile, many for-profits are cutting corners elsewhere. Few offer a school-lunch program or bus transportation for students in outlying towns. Expensive extracurricular programs such as sports are limited. And most aren't equipped to handle students with severe special education problems, which public schools are obligated to serve. "It is a lot more expensive to educate a child who is disabled or emotionally troubled," says Education Secretary Riley.

Many for-profits say it's this very cost consciousness, plus strong revenue growth, that is bringing them close to profitability. "We can break even with just 30 schools," says Beacon President Ronan--a number he expects to reach within two years. But Merrill Lynch warns that Edison may not make money until 2004, when it will be running nearly 300 schools. Still, such rapid expansion has prompted Merrill to give Edison its highest "buy" rating, arguing that Edison "can grow both its revenues and earnings at nearly 70% [a year] for the foreseeable future."

"WE'RE HEMORRHAGING." The more they succeed, the more many educators worry that for-profit charters are draining money from the public system. "We're hemorrhaging," moans James Caradonio, superintendent of the Worcester (Mass.) school district, which includes schools run by Edison and Advantage. He figures he'll lose $1.6 million this year to the for-profit schools. And in Grand Rapids, 351 students have been lost to charters. "If we continue to lose students, it will jeopardize the current public schools," complains Sue Maturkanich, president of the local teacher's union.

Advocates say that's the point: For-profits--and the charter-school movement in general--are causing the kind of fiscal pain that forces some public systems to adapt to parents' needs. In Lansing, Mich., which has lost 10% of its enrollment to charters--half run by for-profits--and to Michigan's interdistrict choice program, the public schools have instituted all-day kindergarten, an honors program in middle school, and a "community school" in cooperation with Michigan State University. And in Mesa, Ariz., where 1,200 students have defected, the public schools are now offering an early-kindergarten program and have opened an alternative high school. The city is even taking out print and movie-theater ads to get the word out.

Clearly, the for-profit industry is already a force in the reshaping of U.S. education. And even as the debate rages over the schools' effectiveness, they continue to catch on, district by district. It's not impossible to imagine the day when school boards will offer families a menu of choices among for-profit, nonprofit, and traditional public schools. Of course, the for-profits will have to deliver on their grandiose promises for that to happen. But if they come close, U.S. education could be in for a revolution.

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