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SEIFFE:  Keep The Lottery...Sell The Schools

Monday, June 5,  2006

By Ralf Seiffe

This week’s news reported yet another disappointing performance by America ’s school children.  The gist of these reports told us that our kids are on par with the rest of the world through the Fourth Grade but as they soak up more of the nation’s education product, they begin to slide towards the bottom of the international pack. This problem is nothing new; the plunge is a long-term trend that will eventually devastate the nations’ living standards.  Recently, the idea that we should sell the lottery and use the proceeds to “fix” the schools has occurred to the innumerate.  If the people of Illinois --and almost all other states in similar straights--were rational, we’d keep the lottery and sell the schools.  

Portfolio analysis is the science or art of allocating scarce resources to achieve the best possible returns.  Usually, this notion is applied to collections of financial investments in a mathematical and rational way with the object of maximizing those returns.  Measurement includes recognizing the percentage return with explicit recognition of the variability, or risk, of return.  Modern portfolio analysis is very much an Illinois creation because the foundational, academic work was the product geniuses like Black, Miller and Modigliani while they were at the University of Chicago in the late ‘50’s and early 1960’s.  

Resources available to educate our children are scarce and that means we cannot do everything we might want to do.  We owe our children the use of rational methods to make those choices.  Portfolio analysis is such a tool but it’s not normally used to assess publicly owned businesses. Perhaps it should be.  With the left’s characterization of sending more money to Big Education as “investments”, it appears that the advocates of bigger “Big Ed”  invite the use of the private sector’s analytical tools.    

First, let’s look at the lottery.  It works, it produces and it has a potential for increasing future value.  Management is involved, results are predictable and there are new products coming out all the time to maximize revenues and profits.  A portfolio manager would probably mark the lottery a “Hold”. 

A portfolio manager looking at the schools’ fundamentals would find inputs are up while outputs down.  Specifically, unit costs are up--and up faster than inflation---but the standardized scores aren’t improving enough to justify the expense.  Management doesn’t appear to have any fresh ideas other than increasing the manager/worker ratio and accommodating its workers.  The bottom line is that the education business is not one with a recipe for increasing the future value, that is the living standards of Americans.  It earns a “Sell” rating. 

This analogy won’t stand any more stretching but it does point to a solution.  Typically, portfolio managers have several choices in which to invest in any industry segment.  If, for example, you want to put money into semi-conductors, there is Intel, Advanced Micro Devices Texas Instruments and others.  Want to buy banks?  Chase, Morgan, Citibank and others will welcome you.  

Think about one of the first manufacturers of semi-conductors, Fairchild Camera.  Several of its workers observed the company was suffering from increasing costs, declining outputs and an opaque management.  Instead of asking the state legislature to sell the company’s patent portfolio, (their equivalent of selling the lottery), they simply left to form a new company they called Intel.  Few of us remember Fairchild but nearly everybody has “Intel Inside”.  

Where is the equivalent in education?  Where are the visionaries who should move education beyond the World War I-era socialism of another University of Chicago product, John Dewey?  

Therein may lay the answer to the problem of public education.   People who have concluded that Big Education is a failure often recommend root and branch removal which, I confess, is an appealing idea.  Nevertheless, taking that approach will result in preserving the status quo because it will set up a win/lose situation in which the teachers are compelled to harden and defend the status quo. 

The only way to create a new educational paradigm is to attract teachers dissatisfied with the current situation into a new, better system.  Because improving the education system is so important, this is a task that should become an opportunity for portfolio managers of all persuasions. 

What would happen if a private company simply offered a “better” education to the first 10,000 kids that showed up in downtown Chicago ? No vouchers, no need for state funding, nothing more than the “free, public education” that Big Ed  tells us it’s providing.  That would be a “Buy” for Chicago parents. 

To attract teachers simply make these promises. In exchange for passing a comprehensive test of competency, the classroom will be yours, discipline enforced and administrivia will be ruthlessly minimized.  New converted teachers would be offered the same salary as they earned in public schools but benefits will be defined contribution.  As a kicker, there will be an opportunity to earn a 25% bonus based on objective performance measures. 

Let’s assume that this could be all be done for the same cost we spend, per student, now.  If that’s $10,000 per student, the annual cost for a large demonstration would be $100 million.  Assuming one planned for 12 year demonstration plan, this whole thing could be done for less than the yield of two years’ Lotto winnings. 

Success would be defined as opening the eyes of Illinois taxpayers and there are four secret sauces mixed into this plan to accomplish that goal.  The first is the emasculation of the teachers unions because they would have no standing to object. The second would be that it would not take 12 years to show the superiority of the system.  The third would be by creating a private school without a religious connection, the demonstration schools would show the value of financing the child, rather than the schools.  Finally, the private company could advertise their success and drive consumer adoption.  

In return for their investment, the promoters would become contractors and simply begin to take over failed school systems with a better way.  This is no different than for-profit hospital models.  A fully developed model would have the contractors taking over the school’s real estate and if efficient enough, make contributions to the outstanding pension obligations. Real portfolio managers would soon take notice and move capital to the successful providers.  

The plan to sell the lottery make no sense because the numbers say it will never realize the value it has in public ownership.  The public school system continues to demonstrate its ineptitude.   Keep the lottery and sell the schools.

©2006 Ralf Seiffe

Ralf Seiffe advises business start-ups and product launches from Chicago, Illinois and is a political analyst and columnist for the Illinois Leader and Illinois Review.