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Investing in irony

With a chunk of its employee pension fund, Florida is about to buy the nation's most financially imperiled private education management company.

Published September 26, 2003

Edison Schools Inc., the private education management company founded by Chris Whittle, has taken a beating in the financial markets. Its stock, selling for as much as $36.75 a share in 2001, dropped to 15 cents last year. Its very survival depends on a white knight to take it private, some riverboat gambler willing to bet on what seems certain to be a losing hand.

Enter the state of Florida, and its $92-billion employee pension fund. Liberty Partners, a New York investment firm that manages a $1.8-billion chunk euphemistically called "alternative investments," is planning to take a $174-million flier on Edison. Liberty would buy a 96.3 percent share of Edison, giving Florida the distinction of being essentially the sole owner of the nation's largest and perhaps most financially imperiled school management business.

Pardon the sarcasm, but was there no Enron stock left to buy?

The Edison buyout raises a host of uncomfortable policy questions for the state Board of Administration, which oversees the pension fund, and the irritation to retired public school teachers may be the least among them. Edison is largely failing as a for-profit alternative in the public school market, which means not only that any investment in its future carries considerable risk but that the buyout puts the state in the odd position of using teachers' pensions (nearly half the pension members are teachers) to prop up their adversary.

That may taste delicious to Gov. Jeb Bush, a proponent of privatized education who has endured relentless attacks from teacher unions, but it has caused enough heartburn that public employee retirement funds in Los Angeles, New York City and Ohio have banned the practice. In Florida, House Democratic Leader Doug Wiles already has fired off a letter to Bush, noting that Edison is planning to nearly double Whittle's salary in part as reward for getting the state's money.

"This transaction will risk the hard-earned savings of Florida's public employees on a private company that has lost millions of dollars, is deeply in debt, has been subject to SEC (Securities and Exchange Commission) scrutiny, and is being sued by its shareholders for misleading accounting and disclosure practices," Wiles wrote Thursday. ". . . 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."

The principle obligation of pension fund managers is to provide the highest return on investment, but governments do differ in one respect. They can never fully ignore the public policy implications of their actions, as was the case with South Africa investments during apartheid or tobacco investments during a massive liability lawsuit.

Still, the bottom financial line matters, and that's where the response by state board director Coleman Stipanovich is more than a little disconcerting. Stipanovich, asked to defend the investment, was instead quick to claim the ignorance of his political bosses.

"The trustees don't get down to micromanaging investments," Stipanovich said. ". . . We simply don't interfere in terms of the companies that (Liberty Partners) invest in."

That response sounds entirely too much like the excuse pension managers offered in defending the state's grievous losses with Enron, and it is hardly reassuring.

[Last modified September 26, 2003, 01:49:38]


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