Legislators, teachers balk at deal for Edison Schools
The for-profit school management company with an unprofitable history may be the recipient of $182-million from the state's pension fund.
By HELEN HUNTLEY
Published September 26, 2003
Democratic legislators and teachers sharply criticized plans for the state pension fund to invest $182-million in a for-profit school management company Thursday, while Gov. Jeb Bush took a handsoff position.
The pension fund, through one of its money managers, is putting up the money to buy out the shareholders of Edison Schools Inc. and pay off its debts. In addition it is providing a line of credit the company can tap for operating expenses.
Critics expressed shock that a fund that provides retirement benefits to teachers and other public employees would take such a large stake in a company that attempts to make money by privatizing school management. Others worried more about Edison's shaky finances. The company has had only one profitable quarter since its founding in 1992.
"Our public employees have dedicated their lives to public service, and I'm certain that the majority would not approve of a significant investment in a business that seeks to eliminate their own jobs," House Democratic leader Doug Wiles, D-St. Augustine, wrote in a letter to Bush. He said the state should sever all ties to Edison. "We must take steps to ensure that the State of Florida is not in the business of bailing out failing private companies."
Attorney Gen. Charlie Crist, one of the pension fund's three trustees, said he plans to ask for more information.
"I'm very conservative, particularly with other people's money," he said. "I am not sure that it's the best of investments, but I don't know that it may not be."
The other two trustees, Bush and chief financial officer Tom Gallagher, said they will leave the investment decisions to the professionals.
"I don't think that we should make investment decisions based on politics," Bush said. "That would be a disaster for our state and for the 700,000-plus pensioners. I've not studied the investment. We create the broad parameters of the mix of investments that the pension should make, and we do it based on expert professional advice. ... I have total confidence in the ability of the director and his team to make these decisions, and I'm not going to second-guess them."
The $92-billion pension fund relies on outside money managers, including Liberty Partners, a New York company that has been investing state pension money since 1993, generating a healthy 12.11 annual rate of return. Liberty currently invests $1.1-billion in state pension funds, although it has been approved to manage up to $1.8-billion.
The pension fund is the sole investor in Liberty, which decided to make the investment in Edison. If the deal goes through, Liberty will own 96.27 percent of Edison and will control the company's board of directors. Edison founder Chris Whittle will own the other shares.
Democratic legislators asked why Liberty would make such an investment.
"It just doesn't pass the smell test in my estimation," said State Rep. Curtis Richardson, D-Tallahassee.
Senate Democratic leader Ron Klein, D-Delray Beach, said the investment is "against the hearts" of most public school teachers. "Why do you need to do that? Is it to jab them, or is it just such an unbelievable investment that we can't pass it up?"
St. Petersburg High School teacher Don Macneale felt jabbed.
"I'm depending on that pension, and so are a whole lot of other people," he said. "To see money invested in an obvious loser like this is outrageous just from a pure financial point of view."
There is no disputing that investors have a low opinion of Edison Schools. The company went public four years ago for $18 a share and peaked at $36.75 a share in 2001. Last year it traded for as little as 15 cents. Thursday it closed at $1.68, just a little below the buyout price of $1.76 a share.
Edison officials said they want to take the company private because the low stock price is hurting business. "Edison's stock price has been inaccurately perceived by school districts, charter schools and others as indicative of the company's ability to perform its obligations," the company said in a public filing.
Liberty Partners was one of 72 potential investors the investment company Bear Stearns contacted last spring on Edison's behalf. Nineteen met with the company, and four expressed serious interest.
One analyst said he thinks Liberty is getting a good deal.
"It's something of a steal," said Trace Urdan, who follows Edison and other education-related stocks for ThinkEquity Partners in San Francisco. He said Edison has done a good job recently cutting costs, getting out of unprofitable contracts and focusing more attention on less-controversial aspects of its business, such as running summer-school and after-school programs and licensing some of its software and systems.
Where Edison has run into both political and financial trouble is in its core business of operating schools under contracts with local school boards or charter school boards. It currently operates 150 schools in 23 states.
One of Edison's schools is in Miami, where evaluations have been mixed. Students have made gains one year, then lost them the next year. Researchers at Western Michigan University evaluated student achievement at all Edison schools opened in 1995 and 1996 and found the students' academic progress was about the same as that of comparable students in conventional public schools. In every case, Edison students did not perform as well as the company claimed in its annual reports.
Analyst Urdan said one of the advantages of taking the company private will be the ability to avoid public scrutiny. "When they become private, they don't have to tell the public anything," he said. "It will be much more difficult for unions and critics to go after things."
For-profit companies that have attempted to privatize public school operations generally have not been profitable, said Henry Levin, director of the National Center for the Study of Privatization in Education at Teachers College at Columbia University in New York.
One problem is that contracts are usually for three to five years, which may not be enough time to recover startup costs and turn a profit. If the contract is not renewed, the company loses. Levin said the for-profit companies often criticize high administrative costs in school districts but usually have even higher administrative costs themselves. He said the for-profit companies also have to spend money marketing their services.
But Levin said he thinks Edison could be profitable with the right approach.
"My guess is if they can move a lot of their effort away from managing of schools to becoming a proficient provider of tutoring and summer schools, then they do have a chance," he said.
Regardless of how the buyout turns out for Liberty Partners - and for the Florida pension fund - it appears to be a good deal for Whittle.
Edison executives, including Whittle, will immediately get about $9-million for their shares and options. The company will be required to purchase up to $7-million in additional shares from Whittle over the next five years. He also has a five-year employment agreement that will pay him an annual salary of at least $600,000 with a potential for a bonus of 275 percent of his base salary, in addition to other benefits.