Reading, Writing, and Revenue

The Edison Project's formula is simple: Take a Minneapolis public school, add some entrepreneurial savvy, and watch the profits roll in. Trouble is, it doesn't add up.

Still, parents and officials in many districts have asked the company to take over additional schools, helping to raise its total revenues (chiefly tax dollars turned over by states and school districts) to $133 million last year. Earlier this year Edison filed papers with the U.S. Securities and Exchange Commission seeking permission for an initial public offering of $172.5 million in stock. According to its prospectus--an SEC-required document that outlines finances and corporate strategy--the firm plans to expand into the larger school districts that teach roughly half the nation's students. Those districts, the document notes, had combined budgets of $190 billion last year: "Illustrating the magnitude of the overall market opportunity, we estimate that just 1 percent market share would represent approximately $1.9 billion in annual revenues."

How Edison will actually squeeze a profit out of those potential revenues is another question. In interviews, executives have argued that their strategy relies on economies of scale: As Edison opens more schools, costs such as central administration and curriculum development will remain fixed while revenue grows, allowing the firm not only to take a seven-percent pretax profit, but also to spend more at each site than regular public schools do.

In a 1998 interview with the business journal Across the Board, John Chubb, Edison's chief education officer and executive vice president, explained: "Roughly, school systems spend two-thirds of every dollar at the school site and one-third away from the school site. However, we spend roughly 80 cents of every dollar at the school site instead of 66 cents. That helps pay for higher teacher salaries, greater materials, and more intensive staffing."

Jeff Tolbert

Richard Rothstein, an education researcher at the Washington-based Economic Policy Institute, has a problem with those numbers. "That's just a silly way to calculate it," he says. "In most districts, salaries are calculated at the school site and benefits at the district level, but benefits are in fact a site expense." Rothstein argues that on average, public-school districts spend about 90 cents of each dollar on schools and 10 cents on central administration.

Marj Rolland, budget director for the Minneapolis schools, says her district does even better than that. Last year, according to Rolland, 7 percent of the district's budget went to central administration while 92 percent was spent on schools and 1 percent on liability insurance.

Asked about the discrepancy, Chubb says his comments were based on national numbers that may or may not reflect the situation in each city. "It depends on how you allocate the cost," he explains, adding that Edison operates many schools in small districts where administration costs are proportionately higher. As for Minneapolis, Chubb says he's not familiar with the district's budget and advises speaking with Edison's finance department.

Adam Feild, Edison's vice president of finance, says he also can't explain how the company plans to make a profit running the Minneapolis school. One reason, he notes, is that Edison is in the "silent period" the SEC mandates ahead of an initial public offering, and thus cannot publicly speculate about future profits. Like Chubb, Feild says he cannot compare Edison's expenditures to the school district's because he has never looked at a district budget.

Judging from the company's prospectus, no one at Edison is quite sure how the math will work out. A closer look at the document reveals that while Edison claims to have spent more than 80 percent of its money on the schools it operates, that calculation is based on its "revenues"--the tax dollars it receives from school districts. But in each of the last three years, Edison spent about 30 percent more than it took in--meaning that when all costs are calculated, non-school-site expenditures made up more than 34 percent of the firm's total budget. That's more than what Chubb says public systems spend.

In a section headed "We Have a History of Losses and Expect Losses in the Future," the prospectus states that Edison has incurred substantial deficits every year so far, for a total net loss of more than $140 million. "We have not yet demonstrated that public schools can be profitably managed by private companies," the document continues, "and we are not certain when we will become profitable, if at all."

 

Alex Molnar, director of the Center for the Analysis of Commercialism in Education at the University of Wisconsin- Milwaukee, says Edison's biggest asset may be the stereotype of a fat, lazy, inefficient public-school system. That perception, he explains, leads people to believe that Edison can deliver attractive, yet expensive, features such as free computers and a longer school year on the same budget given to public schools.

"Edison rides in on the wings of the perceived evils of the bureaucratic school system," says Molnar. "But in reality Edison is probably far more top-heavy than the public schools who don't need to fly a platoon of wingtipped salesmen around the country to pitch and manage their schools."

For instance, Molnar posits, "They're always pushing the tens of millions of dollars and the three years of research that went into the Edison Design. For what? The decision to use Success for All reading, the decision to use Chicago math," he laughs, ticking off programs developed by academics and public-school educators and available to any school in the nation. (Five Minneapolis public schools use Success for All, a program that focuses on small-group learning. Chicago math, an approach that emphasizes story problems and critical thinking, is in use districtwide.)

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