Members of the Florida Retirement System were surprised recently to learn that, in all likelihood, they are about to become the owners of the nation’s largest for-profit school management company.
The $93 billion retirement system, which is the nation’s fourth-largest among public-employee plans, has some 850,000 participants, of whom nearly half are current or retired public school employees.
Only in the past few weeks have those participants realized that assets from their fund have been proposed to buy Edison 69ý Inc., the New York City-based school manager that has been the target of criticism by teachers’ unions for years.
Key Players in Proposed |
| When the publicly traded Edison 69ý Inc. announced in July that it was agreeing to go to private ownership through a management-led buyout, few people realized that Liberty Partners Inc., the New York City investment firm putting up most of the money, has only one client: the Florida Retirement System. Some in Florida are now concerned that the system, which includes teachers and other school employees, is essentially buying a company that has struggled financially and is involved in the privatization of education. |
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SOURCE: Education Week research |
Liberty Partners Inc., a New York City investment firm with authority to manage up to $1.8 billion of the Florida system’s assets, has proposed to provide the majority of the financing for a management-led effort to buy up Edison’s publicly traded stock and take the company private.
That $174 million deal, in which Liberty Partners would end up with a 96.3 percent stake in Edison, was announced in July and is scheduled to be completed by November.
But what few average folks in Florida understood at that time was that the state retirement system is the sole source of investment funding for Liberty Partners. So completion of the deal would make Florida’s retirement-plan participants, including school teachers, administrators, and janitors, the new owners of a money-losing company whose mantra has been to shake up the status quo in public education.
“It’s a terrible idea,” said Mark Pudlow, a spokesman for the Florida Education Association. “It potentially puts $180 million in retirement funds at risk.”
The concern of the 120,000-member teachers’ union, which is affiliated with both the National Education Association and the American Federation of Teachers is two-fold. The first is that Edison, although it recently reported its first profitable quarter, has piled up losses of more than $354 million over the past 12 years and has yet to prove that public schools can be privately managed profitably without sacrificing quality.
Second, there is a natural concern in Florida and elsewhere about using public-employee retirement funds to invest in businesses whose practices may result in the loss of public-sector jobs.
Although Edison maintains it is not anti-union and does not seek to eliminate jobs where it is hired to manage schools, its critics point to the company’s experience in the 200,000- student Philadelphia school district, where Edison laid off classroom assistants, hallway monitors, and school secretaries when it took control of 20 schools last year.
Still, teachers’ union leaders in Florida say their main concern is Edison’s financial viability.
‘Alive and Well’
Reg Weaver, the president of the NEA, last week wrote to Gov. Jeb Bush of Florida, urging him to reconsider the investment. The governor is one of three members of the State Board of Administration, which oversees the retirement system and several other state investment funds.
“It seems to me that given Edison’s poor performance, sizable debt, and limited future prospects, the retirement savings of Florida’s public education employees may be at risk,” Mr. Weaver said in the letter. “I question why this investment was chosen when other more promising investments might well have been available.”
Adam Tucker, a spokesman for Edison 69ý, said that union officials were distorting the facts.
“Edison is alive, well, and growing,” he said. The company recently announced its first quarterly profit—$10.2 million on revenues of $139.8 million in the three months that ended June 30. For fiscal 2003, Edison lost $25 million on revenues of $420.8 million, compared with a loss of $86 million on revenues of $466 million in 2002.
While the company has endured numerous setbacks in the past two years, including canceled contracts, a U.S. Securities and Exchange Commission inquiry into its accounting practices, and continued losses, some experts on Wall Street have suggested the proposed buyout is actually undervaluing the company.
On the issue of job security, Mr. Tucker said that while the company did eliminate some public nonteaching positions in Philadelphia, Edison is not out to eliminate public jobs, and that the employees whose positions were eliminated were moved to other roles within the district. Edison, he said, also works with school officials and unions before it implements changes in any district.
“We understand that our success in improving schools depends on healthy partnerships with teachers, and that’s what we seek to foster,” Mr. Tucker said.
Higher Returns?
When the management buyout plan was announced in July, Peter E. Bennett, the president of Liberty Partners, expressed unabashed confidence in Edison’s prospects.
“Liberty believes that Edison will continue to be the leader in the K-12 sector of education in the United States,” he said in a press release at the time. “We expect Edison’s leadership in this important sector to continue to grow.”
The investment firm declined to comment last week on the Edison deal.
Critics of Florida’s involvement in the buyout have questioned how the deal came about and whether it can be stopped in its tracks.
But Gov. Bush told the Miami Herald late last month that even as a member of the state board that oversees the retirement plan, he leaves investment decisions up to the state’s financial professionals. And he said he was not involved in Liberty’s decision to invest in Edison.
“We have a responsibility as trustees to create the policy, but we don’t make the [investment] decisions,” the governor told the newspaper. “I didn’t know about it. I shouldn’t know about it. And that’s it.”
Mr. Pudlow of the Florida Education Association said: “It’s hard for us to fathom that the state of Florida doesn’t know what’s going on. No one had any idea that the state was investing in this way. People are shocked by it.”
Coleman Stipovanich, the Board of Administration’s executive director, said investments of this kind are not uncommon and are exactly what Liberty Partners was entrusted to find.
“Liberty performed extensive research [on Edison],” he said in an interview. “We absolutely do know what’s going on. When we give [Liberty] full discretion to manage these assets for us, that doesn’t mean we stick our head in the sand.”
For a large public retirement fund such as Florida’s, an investment in a company such as Edison may be a higher risk than than relatively safe bets in real estate or fixed-income securities, Mr. Stipovanich acknowledged. But the returns are potentially higher, too, he said.
The Edison deal is believed to represent about 5 percent of the $1.8 billion in Florida retirement funds managed by Liberty Partners, but it would be a much smaller percentage of the entire $93 billion retirement fund.
Besides Gov. Bush, the other members of the state Board of Administration are Tom Gallagher, Florida’s chief financial officer and a former state education commissioner, and state Attorney General Charlie Crist, who also has served as state education chief. All three are Republicans.
Only Mr. Crist has said he plans to question the investment.
Clive Belfield, the assistant director of the National Center for the Study of Privatization in Education, based at Teachers College, Columbia University, said he did not believe that the Edison school management model’s potential threat to public jobs was the real issue upsetting the unions.
Their chief concern, and with good reason, was about their members’ retirement money being invested in a company whose viability is a question mark, he said.
“It’s a very difficult industry to make a profit in, and this is a strange financial move, leaving aside whether or not privatization is a good or bad idea,” Mr. Belfield said.
Despite the controversy it has caused in Florida, the Edison buyout isn’t yet a done deal. Liberty Partners’ offer of $1.76 a share was approved by Edison’s board of directors in July, but it still needs the approval of the company’s shareholders. A vote of the shareholders is expected to take place early next month.
