I will protect your pensions. Nothing about your pension is going to change when I am governor. - Chris Christie, "An Open Letter to the Teachers of NJ" October, 2009

Sunday, January 2, 2011

The Chris Cerf Story: Part I

We are about to install a new Commissioner of Education here in New Jersey: Chris Cerf. Following the disastrous reign of former commissioner Bret Schundler, Cerf will have to step into the fight Chris Christie has picked with the NJEA and attempt to implement the education policies on which the governor has staked so much of his reputation.

The reaction of the NJ media up until now has been cautious optimism: we seem to be hearing a lot about how well Cerf plays with others, how he should replicate what he did as a Deputy Commissioner in New York City, and how he will hopefully bring a newfound respect to teachers that has been sorely lacking in the Christie administration.

What the NJ media has yet to report on (surprise!) is how Chris Cerf has become the poster boy for the corporatization of American education.

A close examination of his career should give anyone who cares about NJ's schools pause. All through his professional life, Cerf has pushed for educational policies that have enriched private interests but produced results that are, at best, underwhelming. More than once, he himself has pushed the ethical envelope when dealing in the nexus between politics, business, and education.

Let me be clear: I am not saying that the man should or should not be confirmed to the position. What I am saying he has not yet been properly vetted, and both the press and the Legislature have the obligation to get the full story of his career on the record.

These posts should serve merely as a starting place for understanding who Chris Cerf is and how he will run New Jersey's schools.

* * *

Cerf started his career by teaching for four years at a private school: Cincinnati Country Day. Considering he went right to law school afterwards, he sounds like he would have made the perfect Teach For America candidate - except he would have then had to teach in a school with students whose home lives were considerably more challenging.

CCDS is a lovely school, especially given the 9:1 student-to-faculty ratio and average class size of 15. Perhaps that's why tuition for high school students is over $20,000 a year. The students there are definitely not in the same demographic as the urban public school kids Cerf has purported to serve throughout his career.

After clerking for Sandra Day O'Connor and working in the Clinton Administration, Cerf found his way to Edison Education. Those of you paying attention to such things will remember Edison's CEO, Chris Whittle, a dashingly nerdish figure who would don a bow tie and take to cable talk shows to preach the gospel of school privatization:
Edison claims that its established schools produce yearly test-score gains several times better than in public schools. "We're in this to do great things in achievement," Whittle said. "Last year our gains actually improved across the entire system." But several independent studies question those claims. "With a rigorous curriculum, a longer day and a longer year, you don't need to be an education professor to know that should produce better results, but to my surprise, it didn't," said Western Michigan University education professor Gary Miron. "They were doing similarly or slightly worse."
Cerf started at Edison as general counsel in 1997, eventually becoming president in 2001. With the benefit of hindsight, his tenure hardly looks distinguished. Most infamously, Philadelphia hired Edison in 2002 to run several schools throughout the district; there was even talk of turning over the entire city school system to Edison at one point. Edison, however, couldn't produce the results it claimed it could, and Philadelphia, Baltimore, and other cities eventually pulled the plug.

At the time, however, school privatization was hot. Edison went public in 1999 at $18 a share; in 2001 the price peaked at nearly $37. But then Edison became a victim both of the stock market bubble and its own failures, including an SEC action that found the company had misstated its revenues by millions of dollars. Shares plummeted to $1.68 by September of 2003.

Whittle and Cerf needed a buyout; someone with pockets deep enough to take the company private and protect the value of their own shares. Ironically, their white knight turned out to be funded by none other than the Florida teachers pension fund.

Yes, you read that right: Florida teachers paid for Whittle and Cerf to take their company private - a company that advocated for the continuing corporatization of public schools. Understand that the fund itself was being run by a firm that was engaging in some questionable practices:
In 2002 Whittle retained the Bear Stearns investment firm to look for a private buyer. Only four of seventy-six potential private equity investors made a bid. The winner was Liberty Partners, which paid $112 million for the stock (except for 4 percent Whittle retained) and $70 million in a new loan. But the biggest winner was Whittle: Fortune estimated he could gain $21 million, plus new loans, an extension on old loans, pay that nearly doubled to a minimum of $600,000 a year and a bonus that could be worth nearly triple his base pay. 

Liberty Partners is an unusual firm. Many private equity companies use money from rich individuals, including the firm's principal partners, and from institutional investors, like pension funds, to buy public or private companies, spreading the risk among many different investors. But all of Liberty's money--about $1.8 billion--comes from the $92 billion Florida pension fund. So FRS became virtually the sole owner of Edison. In late November of last year [2003], after public criticism of the deal had surfaced, Liberty's eight partners also invested 2 percent of equity, a relatively small share. By nearly any standard, the Florida pension fund's purchase was very large and undiversified, and it fell outside Liberty's standard portfolio and expertise. 

While Liberty was bidding for Edison, it was also negotiating renewal of its contract with the Florida State Board of Administration, which oversees the pension fund. An outside consultant to SBA, Alignment Capital, produced a series of scathingly critical reports on Liberty Partners from April 2002 to early July 2003. It recommended, for example, that SBA should "terminate the relationship as soon as possible" if it could not renegotiate terms. Alignment found that Liberty's investments were poorly chosen, were inadequately diversified, and performed badly for the level of risk in its portfolio. Its records were in "shocking...disarray," and its fees "particularly egregious." Alignment recommended that Liberty not invest in both equity and debt of a company. [emphasis mine]
The deal was approved by the three trustees of the FL pension: CFO Tom Gallagher, then-Attorney General and future-Governor Charlie Crist, and then-Governor Jeb Bush. It's worth noting that Bush was a big "reform" advocate, establishing the state's first charter school and pushing hard for standardized testing.
Last July 14 [2003], Liberty formally signed the deal with Edison, which Coleman Stipanovich had known about since March. On July 15 the SBA director for alternative investments wrote to Liberty Partners proposing contract changes: Liberty would limit investments to no more than 20 percent of any company, or $60 million; it would not be allowed to invest in debt and equity; and its general partners would invest 5 percent in any equity. Under those conditions, Liberty could not have bought Edison the day before. 

The timing was very curious, but SBA says it was just a "coincidence" that "had nothing to do with Edison." Stipanovich also continued to defend Liberty and its purchase of Edison, even last fall after the Alignment critiques became public. Both he and Governor Bush said it would have been inappropriate for them to intervene in the decision politically. But many Floridians were already upset with risky pension schemes and blamed lack of oversight for Florida's pension fund losing $325 million on Enron stock in 2002--three times the loss of any other pension fund--when its investment manager bought heavily as the stock plummeted. "Pardon the sarcasm," the St. Petersburg Times editorialized after the Edison deal became known last September, "but was there no Enron stock left to buy?" 

With its contract up for renewal and under criticism, Liberty had an interest in pleasing Jeb Bush, who had promoted privatization and school vouchers (even though his programs have encountered legal problems, criminal investigations and a state investigation finding serious "lack of accountability"). How better to do that than save the flagship of school privatization?
"With all the possible investments that you could make in our economy where the likelihood of making a significant profit is so much more evident, why would you pick this company?" Abrecht asked. "How do you explain it except that if Edison had collapsed it would have been a huge blow to people who promote privatization of education, not as a business, but out of ideological motivations?" [emphasis mine]
According to the filings with the S.E.C., when Edison became a private company in 2003, Mr. Cerf was awarded 22.22 percent of so-called Class B contingency shares, a total of 20,000 shares in the company once they vested after five years. He was the only Edison official other than the company’s founder, H. Christopher Whittle, to be named in the filings as a beneficiary of the deal. 
Because the company is private, its does not have to disclose its financial statements or the value of its stock, which depends on its profits. But the S.E.C. filings laid out several hypothetical scenarios, showing the potential value of the different equity stakes after five years, that listed Mr. Cerf’s shares as potentially worth from $1.1 million to $6.7 million.
So the pensions of Florida teachers were used to rescue a failing company that advocated education policies counter to those of the teachers unions. This buyout saved the contract of an investment firm that was doing a lousy job managing the pension by playing to the ideological predilections of a powerful governor, who just happened to be the brother of a president who ushered in No Child Left Behind, the law that set the stage for "school choice."

That Cerf and Whittle made out very well in the deal was undoubtedly a happy coincidence.

Once the deal was done, Cerf moved on to his next gig: the NYC schools, where he would reconnect with his old friend from his days in the Clinton administration, Joel Klein.


Anonymous said...

another robber baron...when will people smarten up?

Duke said...

When the press and legislature do their job and give us the facts we need on folks like Cerf.

Just doing my little bit to help...