Book | Budget, Taxes, and Public Investment

Risky Business: Private Management of Public Schools

Risky Business

1996  |  EPI Book

Private Management of Public Schools

by Craig E. Richards, Rima Shore, and Max Sawicky

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Doubts about government efficiency have embraced local public education, which in todays global economic environment is viewed as a near life-and-death matter for the nations youth. While such doubts can be attributed in part to disappointment with the general shape of the economy and to anxiety over federal budget deficits, there can be no question that the public sector, including public schools, could benefit from ongoing trials of reform. This book examines one idea for education reform that has attracted the attention of local officials: hiring business firms to manage public schools or public school systems.

Contracting in public education is not new. Assorted tasks within schools, such as specialized instruction or food services, have been contracted out for decades. Moreover, public administrators have long relied on the services of consultants in the management of public schools. The projects examined in this book take contracting a giant step further, by transferring the management of entire schools or school systems to private firms.

The key findings that emerge from this study are the following:

  • Actual experience in contracting out the management of public schools to business firms is rare. Business firms seeking such business are startups that have yet to demonstrate expertise. There remains no empirical evidence that such arrangements can improve public education, while failed experiences to date have cost communities money, time, effort, and morale. For reformers in search of proven innovations or demonstrated cost savings, contracting is the wrong option. It can be approached only as an experiment.
  • We have yet to see genuine competition in the market for education management services. For contracting to provide the economic benefits commonly ascribed to it, governments must have a variety of choices and organize the contracting process to exploit competitive forces. Local governments have not been sensitive to the prerequisites for competition in education contracting, thus raising basic questions about their capacity to master the education market.
  • A basic requirement for any educational reform, including contracting out, is establishment of an information system that will gather and report baseline data on student achievement and make possible rigorous evaluation of educational practices. To date, the limited efforts at contracting out have not placed a priority on information gathering or evaluation.
  • There is no evidence that education contractors possess proprietary approaches to instruction that are superior to proven methods already in the public domain. The absence of such a rationale for private contracting diminishes the plausibility of the claim that business firms can simultaneously manage schools successfully, reduce public costs, and turn a profit.
  • An important source of appeal for contractors has been offers to advance funds to their potential customers for such things as upgrades in physical plant and computer facilities. The lure of investments, however, reflects the frailties of local government finance more than any inherent advantage in contracting. Contractors are not the bankers of choice for local governments.
  • One of the best-known exponents of contracting out management is Education Alternatives Inc. (EAI). However, EAI has failed to establish a reputation for corporate responsibility, to take effective control of the schools under its purview, to produce improvements in educational outcomes (despite the advantage of additional resources), or to demonstrate that it can make money managing public schools. To date the bulk of the companys cash flow has been derived from stock offerings and financial speculation.
  • Using competition to advance education reform remains an interesting idea that deserves fair and rigorous trials. In Chapter 4, we offer recommendations on ways to approach contracting without forgetting that other pathways to reform are available as well. In any case, we do not take vouchers, contracting, or other market devices to be suitable substitutes for public policies that push schools to meet higher standards of accomplishment. Leadership and support from state and national government will be crucial to the success of education reform.

The chapters in this book adopt different approaches to the evaluation of business management of public schools. Chapter 1, by Rima Shore, is a comprehensive survey of the practice of contracting out in public education, and provides a broad historical background for the U.S. education system as a whole. Chapter 2, by Craig Richards, conducts a close financial analysis of the current industry leader in the field of educational contracting, Education Alternatives Inc., and an in-depth budgetary analysis of EAIs arrangement with the city of Baltimore, Md. Chapter 3, by Max Sawicky, draws from Shore and Richards to consider how economic theory and practical experience inform the concept of contracting out the management of public schools. The final chapter, by Sawicky, Richards, and Shore, focuses on the policy implications of the authors findings.

The Birth and Reformation of American Education

Public support for education in the United States took root and developed in tandem with the birth and growth of the nation. As Rima Shore observes in the next chapter, the purpose of education went beyond the imparting of knowledge; it aimed to instill the value of citizenship. Such values as equity and inclusiveness became associated with the promotion of universal education. Horace Mann saw a salutary social outcome stemming from his belief that “if education be equably diffused, it will draw property after it.”

Although contracting out to business concerns is older than the Republic, education developed in the United States as a service produced by government, not merely financed by it. In the earliest years of the 20th century, interest grew in the possibility of improving education by applying the methods of scientific management used in private industry. John Dewey, among others, took a dim view of such trends, fearing “there is danger that the concentrated interests of business men and their influential activity in public matters will segregate training for industry to the damage of both democracy and education.” In other words, it was feared that business interests would propagate a form of education that was strictly limited to enabling students to function as employees.

The concept of accountability in education, which originated in the Taylorist, mass-production model of industrial organization,1 began as a premise that the educational “product” could be accurately quantified, and that those responsible for producing the product could be provided with material incentives to provide more at less cost. This concept of accountability, under which responsibility is specified in terms of productivity, rewards, and snctions, is distinct from the truism that public officials and employees must be held responsible for their performance. The tension between the demands for accountability on one side and democracy, equality, and citizenship on the other has been fought and refought many times throughout American history, Shore points out, and this push for accountability came to little.

In the decades following World War II, the central developments in education were the expansion of the educational system and the enlargement of the federal role. Both were fueled by
the civil rights revolution and, after the launch of the Soviet satellite Sputnik in 1957, the promotion of educational progress as a dimension of national security. A renewed interest in accountability ensued, this time leading to a program of experimentation, sponsored by the federal Office of Economic Opportunity in the 1970s, known as “performance contracting.” As with current initiatives, those experiments contemplated explicit measurement of and compensation for results, which would be defined chiefly in terms of test scores. Additional parallels include the focus on school districts with disproportionate numbers of low-income families; the grasp for technological fixes in the form of teaching machines that would supplant, to some extent, the need for human instruction; boosterism by business interests, which gave rise to grandiose, unredeemed claims and fatal haste in implementation; charges of contractor malfeasance, in the form of cheating in the administration or reporting of student tests; and the exclusion of educators organizations from participation in the formulation or governance of the arrangement, with predictable ensuing political turmoil.

Todays reconsideration of previously discredited initiatives stems in part from dissatisfaction with educational productivity. There is a widespread perception of a great infusion of resources into the public education system with no commensurate improvement in results. Even if the infusion has been overstated, as a recent Economic Policy Institute report (Rothstein and Miles 1995) shows, the demand for better results, by one means or another, will remain strong.

Current Efforts to Contract Out Management

There is to date little experience with hiring business firms to manage public schools or school systems. The industry leader, EAI, has run only nine public schools, and the arrangement was terminated as this study was being completed. EAIs role in Dade County, Fla., entailed only management consulting, and it was terminated as well. In Hartford, Conn., what began as a plan to run the entire system evolved into a tumultuous consulting relationship and unrealized plans for EAI to run five schools. Subsequently, the school board voted to “dissolve” its arrangement with EAI.

As of the beginning of 1996, the exhaustive list of private management efforts was also a short one. The Whittle/Edison Project began to run three schools in September 1995, a firm in Tennessee had a contract to run a single school, and a firm in Minneapolis held a contract to act as the school systems superintendent.2

The only track record thus far belongs to EAI in Dade County, Baltimore, and Hartford. Evaluations of the companys educational impacts in Dade County and Baltimore showed no gains relative to schools outside its purview. No evaluations of their usefulness in Hartford have been conducted, except for the citys summary judgment that the firm had to go. Similarly, its management outcomes (with respect to education, facilities, security, etc.) in Baltimore were no better than those in other schools used as benchmarks. For such little return, as Craig Richards shows, EAI had the benefit of significantly greater resources in Baltimore. If we accept the customers judgments as final, EAI failed in all three locales.

To be fair, some latitude is called for in evaluating the efforts of EAI and other school-management firms, as the industry is in its infancy. New firms in emerging market might naturally be associated with above-average financial and investment risk. Also, their educational methods might be expected to evolve, in view of the firms limited experience with implementation. Shore reports that, indeed, some advocates of contracting make the reasonable claim that a new program might need a decade before it can begin working to best advantage. But this likely time lag raises a risk: educational reform efforts are subject to influence by parents and public officials who want reforms to yield quick results. The implied political frustration could block viable reforms, encourage unrealistic demands by reformers and unrealizable claims by prospective contractors, or force a fatal haste in implementing the program.

Another key concern about the viability of contracting out school management is whether business firms can deliver the expected service and still make a profit. Richards shows that EAI has failed to profit from any of its efforts. (The company has reported earnings, but they can be attributed to interest on assets and capital gains from financial speculation, not to operations.) The bottom line, from the school or school systems point of view, is that it may be exposed to the contractors financial risk. Indeed, Richards shows that EAIs investment operations are more risky than those of the typical local government. Public officials in Hartford and Baltimore have been wise in resisting EAIs demands for greater control over public revenues.

A related issue is the contractors responsibility and integrity, qualities that are important in business relationships where trust, informal agreements, and continuous refining of the arrangement are crucial supplements to formal, written contracts. What may be tolerable or customary in some industries should be unacceptable in education contracting. Richards finds EAIs accounting practices legal but misleading, and news reports have noted EAIs inaccuracies and recalcitrance in reporting on its educational operations.

Finally, as to EAIs budgetary practices in Baltimore, Richards provides a detailed analysis showing that EAI enjoyed a substantial financial advantage in the schools under its control. On this account, other things being equal, it ought to have done better than similar schools outside its control, even if its own educational methods were no better than theirs. But EAI schools gave no clear sign of relative accomplishment, either in test scores or according to the independent evaluation arranged by Baltimore City. Rather than do more for less or for the same resource outlay, it did the same with more dollars. Again, given the short life of the Baltimore experience, the conclusion should not be overstated, but it remains the only real result in this entire field thus far.

Had EAI done better than comparable schools with the same money, the ways in which it used resources differently would be worth investigating. Richards shows that EAI shifted funds away from instructional expenditures and toward facilities, teacher training, and technology consulting. The latter two, not incidentally, were provided by EAI on the advice of EAI in its dual roles of manager and subcontractor. Its lack of success throws cold water on the thesis that deficiencies in these areas are at the root of school productivity shortfalls. It suggests that the problems with Baltimores schools are not necessarily a matter of insufficient spending on technology or misguided efforts to reduce class size or to hire teachers with better credentials.

Contracting and Economic Theory

Is contracting a logical solution to the perceived problems of high education spending and poor educational outcomes? It is, after all, widely accepted by the public that competition and profit-seeking drive firms to greater levels of efficiency in the twin goals of minimizing costs and pleasing customers.

But as Max Sawicky points out, these two goals are not necessarily consistent. A firm might seek advantage over its rival by offering the same product at a lower price, but it might instead offer a different product that made a simple price compaison difficult. A Ford Taurus for $16,000 is better than an identical Taurus for $17,000, but it is not necessarily better than a Mercury for $17,000. In other words, cutthroat price competition might be softened by the availability of products with diverse characteristics. Education contracting clearly falls into this category. Contractors do not bid against each other for the job of delivering a particular average test score at the low
est price; rather, they emphasize the uniqueness of their educational methods. In fact, school management contracts typically do not specify educational performance criteria as the basis for the contractors compensation.

The basic features of education itself widen the gap between education management services and traditional products supplied by firms in more competitive markets:

  • The education “contract” is not just between parents and school authorities. The public interest in educating each child can outstrip the motivations of parents in two respects: universal education provides both societywide economic benefits and citizenship/values benefits that may be of little immediate concern to parents.
  • Defining the nature of education for purposes of contracting is difficult. The nature of the educational product is inherently complex and difficult to define in terms useful in writing contracts or formulating productivity incentives.
  • Necessary regulation of the educational process undermines the rationale for contracting out. Because its outcome is difficult to define, the manner in which education is provided becomes a point of interest and implies some degree of regulatory oversight. Insofar as the contractor must be regulated (that is, managed from without by public officials), there is less distinction between the contractor and a public agency and less rationale for using an outside organization.

The difficulty in defining and measuring “output” is common to all managers of the educational enterprise, whether public or private. Such difficulty challenges the managers ability to specify productivity incentives for workers. In the absence of such incentives, the manager is reduced to stipulating and enforcing rules for how a job is to be done. This is precisely the way public agencies operate now.

The model of labor-management relations as it applies to management contracting in education is vulnerable to criticism. In general, firms may be thought to be competitive because they can use sanctions against workers for unsatisfactory performance. The implication is that labor turnover abets productivity. But longterm job tenure has been found to improve productivity. Moreover, the educational mission itself is built on long-term relationships between school employees and students. High turnover reduces the effectiveness of teachers, counselors, or disciplinarians whose job it is to deal with the same students over a sustained period. Those features make education contracting more difficult than contracting for things like highway construction or food service.

Accepting teachers and other professionals as partners in the governance of education, rather than as inputs with costs to be minimized, requires communication in a mutually acceptable manner and employment based on agreed-upon rules. Most public employees support the institution of civil service standards or collective bargaining as the medium for the employee-employer relationship. If only for its own sake, education management and reform must engage the institutions cooperatively.

Sawicky considers how basic competitive forces might work in a “market” for the management of public schools. Two important problems have been noted: there are few sellers, and they offer diverse products. Competition is best served by many sellers offering the same product so that the customer can comparison shop for the product with the lowest price. Industry failures recounted earlier will discourage investors and dampen expectations for a wave of new sellers. By 1996, EAIs share price had plummeted from its peak of $48 in 1993 to less than a tenth as much ($3.25 as of March 8, 1996). On two occasions, trading in the companys stock was suspended.

The number of sellers in a market depends on barriers to entry. In the case of education management, school districts may expect the contractor to advance them funds for upgrades to physical plant and computer facilities, as EAI and the Edison Project have done. That obligation limits the ability of firms or organizations with little capital to compete for contracts. One possible outcome is that some nonprofit organizations, which have a better record of achievement in education than do the well-capitalized business firms in this field, may be eliminated from contention.

The success of sellers in finding customers also depends on the flexibility, particularly the freedom to exit, that is possible for the customer. Some costs of reorganization are entailed in terminating a contract. There could also be a political penalty for public officials associated with the arrangement. Those factors reduce the willingness of potential customers to come forward.

It could be argued that public school authorities and parents are less interested in saving money and reducing expenditures than in getting better results. In this light, price competition recedes in importance in comparison to a contractors perceived capacity to offer an innovative approach and to risk capital for investments in the customers schools. But contractors claims that they possess uniquely effective educational methods are questionable. Much research on educational effectiveness is in the public domain. Moreover, the use of an improved educational method or the incorporation of new technology or facility upgrades does not require contracting out the entire management of a school. In fact, the bundling of assorted functions (instruction, security, food service, maintenance, accounting) into a single management contract can obscure the savings that might be gained or lost in particular areas.

A special inducement to school districts has been contractors offers of “investments,” typically computer hardware, instructional software, and improvements in physical plant. Of course, any for-profit organization seeks to recover the costs of any such investments, with interest. In effect, the contractor could be said to be offering banking services by virtue of such arrangements. Given the financial records of some contractors, public school officials ought to look elsewhere for lenders. If such funds are not available through public borrowing, then it may be more advisable to reform the process of public investment than to reform the education system.

Implications for Public Policy

In the final chapter, the authors argue that, if local authorities are inclined to experiment with contracting, then they need to consider ways to exploit market forces to achieve better results. A key prerequisite for any reform is the availability of data on the workings of the school system and the performance of its students, so that the effects of reforms can be analyzed.

A basic operating principle is that local governments must understand that the obligation to organize a competitive market lies with them as the customer. Such markets will not necessarily take shape on their own, as previous experience with education contracting has shown. Organizing the market means, among other things, that the contracting initiative should be contingent on attracting a reasonable number of bidders, bidders should be required to conform to some set of specifications as to their obligations under the contract, the specifications should include measures of educational output” on which the contractors compensation will be based, and contractor performance should be subject to independent review. Average districtwide spending per pupil is a particularly poor criterion on which to base the contractors fee, because the contractors actual costs will depend on the specific characteristics of the schools under its jurisdiction. Contracts should be separated by logical function (e.g., instruction, security, food service) so that progress or problems in particular areas can be pinpointed.

Given the special nature of public education, some regulation of contractors will be called for. In addition to setting goals for instruction, a local government will need to consider
the contractors financial practices, its information reporting, its adherence to locally preferred labor standards, and its role in local politics.

Although contracting out has captured the imaginations of many school officials and local governments, it should be remembered that some alternative reform strategies, such as charter schools, public school choice, and school-based incentives, are no less promising. Furthermore, local reform efforts should be linked with statewide and national standards of educational accomplishment.

Hiring of business firms to manage schools may indeed represent the promised land, but first we need properly equipped expeditions to inform us of that. The terrain of education reform remains rugged, but it is not entirely unmapped. We hope this report illuminates previously uncharted territory and provides constructive directions for future exploration.

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See more work by Craig Richards, Rima Shore, and Max B. Sawicky