Could private investors help fund area pre-K classrooms?

February 22, 2015
Author: Tim Shea

Albemarle County has a preschool problem.

Bright Stars — Albemarle’s pre-K program for at-risk youth — has seen its waiting list grow to about 90 in the last two years. What’s more, schools and social services officials say many eligible families don’t bother applying because of the relatively small chance of being selected, and they estimate the true number of at-risk 4-year-olds in the county to be about 230.

As educators across the nation point to a lack of early childhood education as one of the major factors contributing to the so-called achievement gap — the difference between high- and low-performing groups of students — Albemarle is seeing a rising demand for pre-K services among the children who are most likely to arrive at school unprepared for kindergarten.

Elected officials in both the school division and local government say they support Bright Stars, but that they lack the funds and space in the schools to expand the initiative.

While the Albemarle Board of Supervisors and School Board are evaluating their vision for early childhood education, and how to fund it, as part of the annual budget process, some local experts believe impact investment strategies — private investments often aimed at improving social or environmental outcomes while providing a return for investors — could help ease the financial burdens localities are facing in the current preschool landscape, which could then potentially help close the achievement gap.

About 2,000 miles west of Charlottesville, Tom Van Gorder, assistant superintendent of the Park City School District in Utah, said his locality and school division have experienced significant growth and demographic changes over the last 20 years, and those changes have resulted in some student groups falling behind others.

“Our population grew exponentially both in our county and in the school division, so programs for students speaking a second language had to be developed,” Van Gorder said. “As time went on, we had a very large achievement gap forming between our Caucasian students and our Latino students.”

To deal with the gap that the Park City and neighboring Granite school districts are facing, the two divisions are using some creative financing to increase preschool access as a means of improving student outcomes.

The Utah way

Social impact bonds — commonly referred to as “pay for success bonds” — are a type of financing in which private investors put up money and manage a public project. They are usually targeted at improving outcomes for at-risk populations, with the end goal of reducing government spending on those populations in the long term.

Under the model, there are no upfront costs to the taxpayers, and because the desired outcomes are performance-based, the return that investors receive is dependent upon how well the program works.

Funded by Goldman Sachs and J.B. Pritzker, and in partnership with the United Way of Salt Lake and the child advocacy organization Voices for Utah Children, the Granite and Park City school districts are now in the second year of a social impact bond called the Utah High Quality Preschool Program.

The program provides half-day preschool for 3- and 4-year-olds, and aims to serve more than 3,500 children in total. Project representatives argue that increased preschool access can reduce the number of students who will later require special-education services, and thus will save school divisions and governments money.

In Utah’s program, the United Way serves as the financial intermediary with the private funders and commits to repay those investors yearly should the desired outcomes be met. Voices for Utah Children provides research and analysis for the program, while the Granite School District trains the staff and provides professional development.

The students are assessed with the Peabody Picture Vocabulary Test, which is used as a predictor of the likelihood that a student will need special-education or remediation services. Students scoring two standard deviations below the mean — those who are likely to require special education — comprise the cohort for the bond project and are then tracked through the sixth grade.

A return payment to investors occurs each year that a student in the cohort does not require special-education services. Under the bond’s terms, the payments are about $2,565 per child, or 95 percent of the approximately $2,700 Utah provides per eligible special-education student.

In the 2013-14 school year, as a result of the first $1 million investment, 600 children attended preschool. This school year, about 750 children are going to school, thanks to the bond’s second payment of $1.5 million.

Chris Ellis, director of early learning for the United Way of Salt Lake, said the idea to pursue a social impact bond arose because the fundamental pieces were already in place: a high-quality model that had proven results, strong partnerships, significant data and a need in the community.

“[Public-private] partnerships, the strong data and the high-quality program lead to the conception of the social impact loan, and then ultimately the implementation of the project,” Ellis said.

While data about special-education usage in the first cohort will not be available until the end of the current school year — the first year was considered a “proof of concept year” — Ellis said he’s confident in the program and noted that it’s unlikely that the funders would invest so heavily in a program that had not achieved proven results.

Prior to the new bond investments, the community first documented that the preschool program was effective at closing the achievement gap.

“The feasibility study was critical to the development of the social impact loan because it showed that the high-quality program, being operated with fidelity, was able to close the achievement gap in math and language arts for low-income children and also able to reduce the number of these children who needed special education or remedial services during their time in the K-12 system,” Ellis said.

But the initiative hasn’t come without its challenges.

“I think some of our challenges were the product of being one of the first groups to develop and implement this type of funding model. Due to this, we did not have many resources to rely on when we encountered challenges or barriers,” Ellis said, noting that the strength of the existing partnerships helped significantly in addressing problems.

“As we see issues or barriers, we can work together within a collective-impact framework to address them collectively,” Ellis added.

Local application

Josh Ogburn, who is studying social impact bonds at the University of Virginia’s Frank Batten School of Leadership and Public Policy, said such a program certainly could be considered in Albemarle, but expressed concern that the relatively small population size could negatively impact results.

“One reason a small sample size is difficult is because you could have big variations in your results year to year,” Ogburn said.

For example, one mechanism Bright Stars uses to measure student progress is the Phonological Awareness Literacy Screening. If the results of that assessment were to be used as a benchmark, a small number of children performing poorly on the test could have a larger effect on the group’s numbers than if the same number of children performed poorly in a larger population.

“The possibility of large variations year to year could increase hesitancy on the part of investors,” Ogburn said. “Investors might not have enough confidence that students will meet annual benchmarks.”

This year Bright Stars is serving about 150 4-year-olds, though some of those children are funded through Title I and Head Start.

What’s more, Ogburn said, it could be difficult to calculate where in the budget the savings would appear, and how much savings would occur. Utah’s Granite and Park City school districts articulated that the savings would appear in reduced special-education costs.

Ann McAndrew, Albemarle’s Bright Stars program coordinator, said social impact bonds are “an interesting and innovative way to look at funding.”

“The Bright Stars program has consistently been able to show that our students make considerable gains both academically and in social/emotional development during their year in Bright Stars and enter kindergarten more similar to peers in readiness skills,” McAndrew said. “We believe, and research consistently supports, that these early results carry over into positive outcomes for children as they age.”

“There is data available to indicate that children who had the benefit of early childhood education are more likely to graduate from high school, have higher earnings and, as a group, have lower crime rates and teen pregnancies,” McAndrew added. “Besides the financial savings these tendencies create for communities, the social impact is large.”