Chicago Approves Early Childhood Pay-for-Success Plan

By a vote of 42-5, the Chicago City Council on November 5 approved a proposal backed by Mayor Rahm Emanuel to use a pay-for-success agreement to finance an expansion of early education programs for an estimated 2,600 children in the city. The $17 million plan (legislative text) will expand existing Child-Parent Centers in five schools and create a new center at a sixth school for 374 students in January.

According to a report from local station WTTW:

Goldman Sachs, which has entered into several other social impact bonds in other communities, including one for early education in Utah, Northern Trust and the JB and MK Pritzker Family Foundation, will all provide almost $17 million up front.

The program is intended to improve kindergarten readiness, improve third grade reading skills, and reduce the need for special education. According to another report, payments from the city could reach $30 million if certain performance thresholds are met.

Chief Financial Officer Lois Scott said investor returns will be based on three benchmarks of student performance. Higher scores on kindergarten readiness would trigger a one-time payment of $2,900-per-child. Higher scores on third-grade reading tests would generate payments of $750-a-child. And if there is less need for special education services, the savings will be shared between CPS and investors.

“Assuming success at the levels we hope, the estimated rate of return to the investors is 6.3 percent…That’s a little bit higher than where they would finance on a general obligation basis, but there’s no taxpayer dollars at risk that way….. For the upside estimate of 6.3 percent, they take 100 percent of the downside. I would consider it an attractive financing rate,” Scott said.

The legislation was opposed by the Chicago Teachers Union (CTU) and the Service Employees International Union (SEIU). According to the WTTW story:

Jackson Potter, the staff coordinator at CTU, opposes this plan for a few reasons. It only funds half-day pre-K and many parents have complained about needing a full day. Potter doesn’t trust the banks that are lending the money, and believes making a deal with them where children’s educations are involved is risky business. He also says it’s a moral hazard to incentivize a public service like education, rather than ensuring that every student receives the same high-quality education.

And what’s more, CTU believes the mayor is sidestepping the real question of how to adequately fund early childhood education, a service that everyone knows is beneficial to a child’s education in the long run.

Another local web site, the Chicagoist, quoted one of the five aldermen who opposed the proposal, Ald. Scott Waguespack, who said it “is basically privatizing Head Start.”

Head Start has been proven to work for decades…. It reminds me of the parking meter deal. The same type of people came in and said it was a high-risk asset [when] it was a low-risk asset…We lost billions of dollars. We’re not gonna lose billions here. But, taxpayers under this scheme are gonna pay a lot more than if we just went out and re-allocated resources we already have.

Ald. Michele Smith disagreed, calling the proposal “a modest experiment in alternative financing” that would create more CTU union jobs.

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