Preschool expansion via ‘social impact’ bonds

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A group of investors is betting $17 million that getting more of Chicago’s children into quality early learning programs will generate bigger savings in the long term.

The investors will make a loan to the city so that 2,600 additional children can take part in half-day pre-school programs in the distirct’s much-lauded child-parent centers over the next four years, city officials announced Tuesday.

The city expects to repay the investors – including the Goldman Sachs Social Impact Fund, Northern Trust and the JB and MK Pritzker Family Foundation –with interest from the cost savings generated down the road in reduced special education services. If CPS doesn’t save money, the lenders won’t get repaid.

“Too often we think of the bottom line in these companies in dollars and cents,” said Mayor Rahm Emanuel during a press conference at the Velma Thomas Early Learning Center in McKinley Park. “The social impact bond changes that conversation […]. What happens in these rooms matters to the future of the city and that is all of our bottom line.”

City officials did not provide Catalyst with a copy of the contract for the so-called “social impact bond” on Tuesday. A spokeswoman for the mayor’s office said the city will introduce an ordinance to the City Council on Wednesday in order to help CPS implement the loan agreement.

Emanuel also announced on Tuesday that his proposed 2015-2016 budget will include $9.4 million in capital spending for 10 elementary schools to expand preschool offerings. In addition, the mayor said the state will kick in $4.5 million to support new community-based early learning programs. He said all of these programs will help meet his goal of providing preschool to an additional 1,500, low-income 4-year-olds by next year.

The mayor’s critics and early learning advocates, meanwhile, are calling for truly “universal” and full-day preschool for all parents, including those with incomes above the poverty level.

New financing tool

The social impact bond program will launch in November with a cohort of 374 students in six schools – including Velma Thomas – in areas of high poverty and limited preschool offerings. The other elementary schools are: DeDiego in West Town; Melody in Garfield-Humboldt Park; Wadsworth in Woodlawn; Peck in West Eldon; and Hanson Park in Belmont-Cragin.

The cohort will increase to 782 children in the second and third years, and drop back to 680 in its final year. After that, it’ll be up to the city to decide whether it will continue funding the seats.

Chicago’s child-parent centers, which serve preschool to third grade and require parental participation, have been proven to have long-term academic benefits for children. Arthur Reynolds, who has studied the centers for three decades, told The Hechinger Report last month that the programs significantly reduce “remedial education and placement in special education was cut by about 40 percent.”

Social impact bonds – also called “Pay for Success” programs – are a relatively new tool first started in the United Kingdom to finance high-impact social programs. The first such loan in the U.S. was provided in New York City for a jail program; the State of Illinois is also working with a coalition of Chicago-area foster care agencies and other youth service providers on another social impact bond intended to reduce recidivism.

A similar initiative launched last year in Utah can shed some light on how Chicago’s program will work. Goldman Sachs and Pritzker loaned $7 million to the United Way of Salt Lake City to expand its preschool program. When they first start in the program, participating children take a picture vocabulary test which helps predict their likely future usage of special education and remedial services.

Then, “students that test below average and are therefore likely to use special education services will be tracked as they progress through sixth grade,” according a fact sheet. “Every year they do not use special education or remedial services will generate a Pay-for-Success payment.”

In Chicago, the city will pay back investors in several stages, beginning with $2,900 for each child that meets specific academic benchmarks in kindergarten. The city will also pay $750 for each student who scores above the national average on reading tests.

But the biggest cost savings will come from reduced special education services. “Payments for decreases in special education are $9,100 compounded at an annual rate of 1 percent for each child that avoids special education after attending the CPC program,” according to a press release from CPS.

Students will be evaluated through their senior years in high school. Chicago-based IFF, which works in community development finance, will serve as the project coordinator and hire an independent evaluator to analyse the program’s outcomes.

Andrea Phillips, vice president at the Urban Investment Group at Goldman Sachs, said she was very impressed by the work of Chicago’s child-parent centers.

“We’ve taken a look at the prior performance of the CPC program […] and we’re very confident that kids who come through this program will get to kindergarten and be ready to go,” said Phillips, adding that investors can expect to earn interest “in the mid to high single-digits.”

Some concerns

CPS stresses that children will not be denied special education services because of the initiative, but some advocates expressed caution about the program.

Children with severe disabilities are usually identified as needing special education services before they reach preschool. Meanwhile, students with milder conditions such as learning disabilities or dyslexia tend to be identified after third grade, when they begin getting formally assessed in reading, says Rod Estvan of Access Living.

“Unless that disabling condition is identified that early and tackled in a specific manner it’s not clear how much of a reduction can be expected […] unless they’re going to change the curriculum and really move up the scale with these funds,” he said.

Estvan added that CPS should tread cautiously when it comes to children who need special education services.

“The danger is to make this happen by not identifying some kids, to make your markers,” he said.  “It’s not easy to get a kid identified who is in the learning disability category anymore for families, and many parents don’t want their kids identified to begin with, so you could see if this isn’t effective, it could have a very negative consequence for some of these kids because of reluctance to identify.”