Novel investment to boost preschools

June 13, 2013
Author: Joe Barrett | Wall Street Journal

Goldman Sachs Group Inc.  and private-equity investor J.B. Pritzker are lending money for a preschool program for disadvantaged children in Utah—and they will get paid back only if the kids who are most behind do well in elementary school.

The $7 million loan is a new type of funding called a social-impact bond. The investors say the strategy could be a model for privately financed public preschool at a time when government budgets are constrained and the White House is pushing to offer preschool programs to every child.

Goldman previously lent New York City nearly $10 million to spend on programs for teenagers incarcerated at Rikers Island. That money has to be paid back only if the programs reduce the 50% recidivism rate to 40% or lower.

The Utah loan will fund high-intensity preschool programs administered by the United Way of Salt Lake for a total of 3,500 low-income children over several years.

About one-third of the children who enter the program score so low on a certain picture-based vocabulary test that they are likely to need special education and other costly interventions in elementary school, said Bill Crim, senior vice president with United Way Salt Lake. After going through the United Way program, about 95% of those children catch up to their peers and don't need additional help.

The investors will be paid back based on the savings generated by the children with these low test scores who end up not needing special education.

Each of these children will generate annual payments to the investors of $2,470, or 95% of the $2,600 the state normally would spend on each for special education. The payments will last while the children are in elementary school, until the loan is paid off, plus 5% interest.

The first year, United Way will pick up the repayments from its own resources, but a combination of state and local sources are expected to pick up the tab after that, pending action by the state legislature, Mr. Crim said.

After the loan is repaid, the investors could continue to receive payments at 40% of the state special-education rate, for a total of 12 years, if children benefiting from the program remain in elementary school.

"There is an incredible track record and body of evidence to suggest this intervention works," said Alicia Glen, managing director of the urban investment group at Goldman Sachs. "We feel pretty good about our assessment of the [investment] risks."

"I'm a businessman and an investor and I'm drawn to the idea of investing and creating results-based financing for government at a time when they're terribly constrained," said Mr. Pritzker.

President Barack Obama called during his State of the Union address for preschool for "every child in America." Studies have shown that the government can save $7 for every $1 invested in high-quality preschool programs for disadvantaged youth.