Pre-K's Wave of the Future

March 19, 2014 | Washington Monthly  |  Link to article

A new approach to financing early education could mean taxpayers lose out if pre-K programs don’t meet specific targets. The plans, called social impact bonds, offer the government a less risky way to fund early intervention services, by collecting upfront costs from private investors and returning their dollars (plus some) if the programs are successful. A new report from the Center on Law and Social Policy (CLASP) lays out how social impact bonds generally work and why they’re used—and describes some of the potential downsides to the plan.

Though social impact bonds haven’t been used much for early learning programs before now, business interests in early interventions are nothing new. The U.S. Chamber of Commerce Foundation, for one, describes its interest in early childhood education as “an investment in workforce development,” and plenty of other business-oriented groups publicly support increased access to high-quality early learning programs. Social impact bonds offer those corporations a more direct way to support early interventions.

Here’s how it works. Private investors offer the start-up dollars for an early educational program—in exchange for their dollars back, plus a bonus, if the program achieves success. The investors partner with a public entity (like a school district or state government) to sign a contract that requires the program to achieve certain targets, like meeting a set passage rate on certain assessments or avoiding the use of special education or remedial services as the pre-K children enter K-12 education. If the targets are met within a set time frame (maybe four to six years at most, according to McKinsey & Company), the government repays the investors, plus their bonus. If not, the investors bear the costs of the program themselves.

There are many variations on that model, of course. Most social impact bond projects, including one focused on behavioral therapy at Rikers Island and another to provide services to homeless people in Massachusetts, are just getting underway. So it remains to be seen which might work best for investors or for taxpayers. The CLASP report goes into more detail about some of the options, noting their pitfalls and potential upsides. It also describes some of the social impact bond programs currently in practice for pre-K, prison, and workforce programs, including a Goldman Sachs-led pre-K social impact bond program in Salt Lake City, UT.

Those and other programs offer substantial promise in some aspects. Perhaps the strongest argument for a social impact bond program, as the report notes, is its unimpeded focus on outcomes. Too often, the quality of pre-K and other education programs falls victim to efforts to expand access. Private investors could refocus those the attention on performance to ensure children are in programs that are effective.

But neither taxpayers nor pre-K programs necessarily stand to benefit from every aspect of social impact bonds. The CLASP report also explores some critical and as yet unanswered questions about the potential—and the dangers—of social impact bond-financed pre-K programs. First, it’s not clear how the programs should even be structured. As the report notes, none of the social impact bond programs have come to fruition yet, so it’s not clear whether the investors will receive much of a return (if any), or whether the initial cases will be good indicators of future programs. And the author notes that while many hold up the cost savings of pre-K programs financed with social impact bonds, those savings are because of the benefits of pre-K itself, like reduced rates of remedial or special education identification—not thanks to the financing structure.

Social impact bond programs also bring additional costs to delivering pre-K services. Aside from covering the costs (and at least for the early adopters, start-up costs of educating people about the program and adapting pre-K programs to the quality level needed), investors get an additional return if the program succeeds. According to the report, McKinsey calculated the costs of providing certain therapy services to juvenile offenders at $3,191, a cost recovered completely within 8 years. But with the social impact bonds’ additional costs of bonuses for investors, the program doesn’t break even until 12 years in.

What return the investors should receive is also murky. For example, how will the programs’ savings be defined? The CLASP report looks at “cashable savings” like avoided costs of remediation or special education. But it also explores long-term impacts and diffuse social benefits, like higher incomes down the line or lower prison-going rates. Those are harder to measure—and would certainly be impossible to track within the time frame of four or six years in which most social impact bond programs operate.

Finally, perhaps the biggest downside to a social impact bond program is one inherent in its nature: Public education is no longer exclusively public. As the report notes, one of the primary goals of a public early childhood education program is to serve the neediest populations. Moreover, though the report doesn’t broach the subject, an entirely separate financing structure leaves early education programs outside of the K-12 education system. Building a PreK-12 system has long been an important goal of early childhood education advocates, both to ensure maintained public investment moving forward and to encourage stronger alignment across pre-K and the early grades of elementary school.

Social impact bonds may hold potential for immediately increasing access to pre-K programs, and may even help drive higher quality for many programs. But are they the wave of the future? The CLASP report shows that, at least right now, there are as many questions as answers.

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