This article was originally published in The Notebook. In August 2020, The Notebook became Chalkbeat Philadelphia.
The Notebook launched in 1994 as a newspaper committed to ensuring quality and equity in Philadelphia public schools. We celebrated the 20th anniversary of the first publication earlier this year. We are featuring an article from our archives each week, shedding light on both the dramatic changes that have taken place in public education and the persistent issues facing Philadelphia’s school system.
This piece is from the Summer 2002 print edition:
by Paul Socolar
Uncertainty continues to surround the role of Edison Schools Inc. in Philadelphia’s school privatization experiment. With the company facing a financial debacle, many are questioning its capacity to run schools here this fall. But Edison is still lobbying to take on more schools.
Controversy has been building since Edison, a for-profit company managing over 100 public schools, came to Philadelphia last August at the request of former Governor Tom Ridge. At that time, some critics said Edison’s no-bid contract from Ridge looked more like a rescue of a troubled, money-losing company than a rescue of a troubled, deficit-ridden school district.
Looking for a turnaround
Ridge gave Edison $2.7 million for a three-month study of school reform in Philadelphia, and critics said he was throwing the unprofitable company a lifeline.
Not only was there money to be made on the contract, but Edison clearly had the governor’s blessing to take on a major role in managing Philadelphia schools.
Edison had been battered by controversy in San Francisco, and it had just been voted down by parents at five schools in New York City, thereby losing a potential $50 million contract to manage those schools. The company’s stock price was hovering around $18 a share, having lost almost half its value in the previous six months. Profitability remained elusive.
The prospect of a major central office role and dozens of school management contracts in Philadelphia seemed like a reversal of fortune and a chance to move toward the "economies of scale" that Edison had consistently claimed would allow it to become profitable. But the reversal of fortune has not come to pass.
Philadelphia to the rescue?
After months of public protest and debate, the School Reform Commission offered Edison a prominent central office consulting role in March. in April, Edison was offered management control of 20 "low-performing" elementary and middle schools, serving 14,000 students.
Good news for Edison? Nope.
Expectations were so high that even the large contracts Edison won were a great disappointment to investors and analysts. And the battle against strong community opposition to their role in Philadelphia had been costly to Edison in money, time, and energy. Investors saw it as a defeat, and the company’s stock began to plummet.
Edison, whose scope is national, had few new contract prospects elsewhere to offset the blow.
"Because we have focused a significant amount of our management and sales efforts in the past several months on Philadelphia, we have not pursued other business as aggressively as we otherwise might have," Edison told its investors this spring.
Array of troubles
Edison was also hit by a barrage of bad news this year from across the country that drove down the stock price almost to $1, including the following:
• an informal investigation of Edison’s accounting practices by the Securities and Exchange Commission, which found that Edison’s financial statements included substantial revenues (and expenses) that never passed through the company. The SEC found that the company’s filings "have not provided accurate disclosure regarding significant aspects of Edison’s business."
• the filing of at least eight class action lawsuits against Edison by angry investors following up on the SEC investigation.
• downgrades by many financial advisers, who cited the company’s cash needs, heavy debt load, failure to meet earnings expectations, and negative media coverage.
• two critical evaluations of Edison’s largest cluster of schools in nearby Chester, where student suspensions have doubled and attendance is down.
• a cheating scandal at two Edison-run schools in Wichita, which caused the severing of the two schools’ management contracts.
• a growing number of other contract cancellations (schools in Boston, Trenton, Minneapolis, and San Antonio), leading Edison to admit to a student "attrition rate" of 7 percent.
As the school year winds down, Edison needs to drum up cash for the coming year’s operations while experiencing a collapsing share price; the stock is down over 90 percent this year.
Critics, from grassroots protesters to the Philadelphia Daily News, say contracting with Edison is too risky and Edison should be dumped. Mayor Street is voicing concern about Edison’s capacity.
"Their financial difficulties and revelations from the SEC have created a huge distraction and created even more uncertainty in a situation that demands clarity," said Debra Kahn, the mayor’s education secretary.
Yet Edison has reason to hope Philadelphia will come to its rescue, thanks to continued pressure from Harrisburg.
Gov. Mark Schweiker is doing his best to boost Edison by advocating that they get more management contracts. Schweiker still wants at least 18 more Philadelphia schools partnered with private providers, according to spokesperson Steve Aaron.
The School Reform Commission is also considering turning over more schools to Edison. "We expect Edison to be working in more than 20 schools, as they have unfulfilled capacity as determined by a staff review, and charter schools and independent schools may select them as a provider," said SRC spokesperson Carey Dearnley.
Edison, with the governor’s backing, continues to push for a role in managing 19 "reconstituted schools," which are being reformed under the leadership of School District staff.
And Edison still has a supporter in School Reform Commission Chair James Nevels. "I still remain optimistic in our deals going forward with all our vendors, including Edison," Nevels said. Nevels has indicated that giving Edison a role in the reconstituted schools is a possibility.
Nevels downplays the company’s financial predicament, maintaining that Edison has "approximately a 30-month cushion" in its cash; he says the company is going through its cash at a rate of $2 million a month.
But the company has made clear that it needs to close a deal it is working on to raise $30 to $50 million in capital. "Our growth and operations plans for the 2002-2003 school year will require us to obtain additional funding by the summer of 2002," the company says in its latest SEC filing.
School startup at 20 schools in Philadelphia alone would require more than $35 million from Edison, according to analysts’ estimates.
Financial analysts interviewed by the Notebook said bankruptcy was not likely but that to be ready for September, Edison may have to scale back growth plans – either the number of new schools they take on in Philadelphia or what they provide in those schools.
One financial adviser who follows the company added that Edison’s problems represent "a well publicized blow-up" that will have "a very large, sweeping effect on their ability to recruit, market, and raise money."
Commissioners Nevels and Daniel Whelan both said they were not concerned about Edison’s declining stock price. But Whelan admitted that it does make it more difficult for the company to raise the money it needs for operations – something it has done in the past by selling stock.
Edison CEO Chris Whittle assured investors in May, "We have never failed to open a school that we said we were going to open, and we’ve always found the capital we needed to do it." But Sandra Dungee Glenn, a mayoral appointee to the School Reform Commission, said she was concerned that turning over 20 schools to Edison was "too ambitious."
"We have laid out some benchmarks that all of these [management organizations] must comply with to assure us that they are able to open schools in September," Glenn said. "With the Edison situation, we need to keep a watchful eye."