The objective of an unconventional partnership between Goldman Sachs, a school district in Utah, and several community charities is to expand the early-education program of the school system. This partnership aims to save taxpayer money and provide financial returns for investors. The expansion of the early-childhood program in the Granite district will be funded by Goldman Sachs and investor J.B. Pritzker through a social-impact bond, also known as a pay-for-success loan. Social-impact bonds are loans that seek to achieve positive social outcomes and reduce future costs by investing in prevention and intervention programs in the public sector.
If successful, this venture would be the first investment of its kind to finance a public school program. Goldman Sachs officials, based in New York City with a significant presence in Salt Lake City, believe this initiative has the potential to bring about significant changes in school policies that could result in greater financial returns for both the district and investors. The investment of $7 million over eight years will help expand the preschool program in the Granite district. Evidence from the charity Voices for Utah Children suggests that students who go through the program are less likely to require expensive special education later in their academic careers. Utah schools receive approximately $2,600 per year from the state for each student in special education, and many students are placed in special education due to academic delays when they enter elementary school.
The idea behind the preschool investment plan is that by reducing the number of children who start school behind their peers, the district can save money on special education costs. Although the money saved comes from state funding, district officials hope to persuade state lawmakers to reinvest these savings into the school system, allowing them to repay the loan with 5 percent interest. Prior to receiving funding from Goldman Sachs and J.B. Pritzker, the district lacked the necessary funds to expand its program and serve all the children on its waiting list. The initial investment of $1 million will create capacity for 450 to 600 additional students to enroll in the preschool program. The goal of this project is to demonstrate the program’s effectiveness and tie repayment of the loan to actual student performance.
Goldman Sachs became interested in the Granite district several years ago after providing a grant to study the impact of its preschool program. Based on the positive results, Goldman Sachs identified an opportunity for its Urban Investment Group to invest in the program. Furthermore, both Goldman Sachs and J.B. Pritzker have agreed to take on all the financial risk. If the program fails to reduce special education expenses, the investors will bear the cost, not the district.
The expected savings by the Granite district will be calculated by the Early Intervention Research Institute at Utah State University. The United Way of Salt Lake is working on the final details of a contract to ensure proper evaluation of the program and tie loan repayment solely to student performance. The United Way is acting as an intermediary between the investors and the district to facilitate this partnership.
While the partnership between Goldman Sachs, the Granite district, and community charities holds promise, experts in early education and school finance express caution. They are concerned that this investment model might influence the district to change school policies to generate greater financial returns. It remains to be seen how this unique collaboration will impact the school system’s early-education program and the potential financial returns for investors.
Steve Barnett, the director of the National Institute for Early Education Research at Rutgers University in New Brunswick, New Jersey, expressed the same concerns, stating that he is worried about the deal being based on overly optimistic projections of the program’s success rate. He also mentioned that the projections are not consistent with the larger body of evidence. The district has until the students complete 6th grade to pay off the loan. If they pay it off early, Goldman Sachs and Mr. Pritzker will receive 40 percent of any additional savings, with the district keeping the other 60 percent. Any further savings after the students complete 6th grade will go solely to the district.
Mr. Griffith warned that the success payments, which could be higher than a 5 percent return on investment for Goldman Sachs and Mr. Pritzker, may cause controversy. He stated that if the amount is high enough, people might criticize the use of education funds for such purposes. However, district officials claim that their focus is solely on the success of the students, and the returns for investors do not affect their objectives or methods. They are not concerned about the investment return at all. One major difference between the partnership in Utah and most social-impact bonds is that the state government is currently not involved in the Granite preschool venture. Typically, governments act as intermediaries between investors and program providers in social-impact bonds. The backers of the Utah venture initially planned to set up a loan-repayment account funded by the state using the money that would have been allocated to the district for special education costs. However, a bill proposing this failed to pass in the Utah Senate vote. It is expected to be considered again in the next legislative session. For now, Goldman Sachs and Mr. Pritzker have decided to proceed with the preschool investment under the assumption that the bill will pass. The loan-repayment fund will be initially backed by a $1 million contribution from the United Way and $350,000 from the Salt Lake County Council. The hope is that the state will pass a law allowing state funds to support the account before this aid runs out.
The Utah venture could serve as a test for the effectiveness of social-impact bonds in education, as they originated in the United Kingdom and have only been implemented in the United States since 2012. Early education is seen as a logical place to experiment with this financing structure because high-quality programs can show clear and measurable results relatively quickly. Advocates of social-impact bonds hope that the Utah venture will not only prove the viability of this arrangement but also encourage more investors and governments to support longer-term partnerships that track the benefits of social investment in education. As more successful examples of social-impact bonds are developed, more funding opportunities may arise in the field of education.
