Why This Preschool Just Wrote Goldman Sachs A Check

The company helped fund a preschool program that's working for the kids and paying off for the investors.

Goldman Sachs is getting a $267,000 check from an unlikely source: a United Way of Salt Lake public preschool program.

The payment is the initial return on an $7 million investment the bank, along with the hotel heir and philanthropist J.B. Pritzker, made in 2013. The funding is structured as a loan known as a social impact bond, where private investors put money to public programs with clear, measurable goals. Private investors do not get paid back unless programs meet certain criteria. 

If the program continues its performance, the investors will receive 11 more annual payments, until their full investment, plus interest, is returned.

This is the first time in the U.S. that a social impact bond is returning money to investors.

The Salt Lake City program funded preschool for 595 low-income children. Without preschool, an estimated 110 of those kids would have needed special education when they entered first grade. Only one did. That standout success saved the state of Utah and local charities $281,550, according to Goldman Sachs. Under the terms of the investment, 95 percent of the savings are repaid to the lenders. 

The social impact bond allows governments to experiment with new services without direct public funding -- and to structure the programs so that they only continue, and provide a return to investors, if they work.

John Roman, who researches these types of financing tools at the Urban Institute, pointed out to The New York Times that the preschool program still costs the state and charities 95 percent of what it would have had they paid for it themselves upfront. However, he said, "the state would reap significant other savings if the students continued to avoid special education, which is generally associated with higher levels of truancy, juvenile crime and other problems."

Social impact bonds can also provide money for programs that otherwise would not have been funded by the government. 

Goldman Sachs has also funded social impact bonds to reduce teen recidivism in youth offenders in the Boston area, provide pre-kindergarten to low-income families in Chicago, and establish a youth counseling program at New York's Rikers Island. 

The Rikers Island program was discontinued in July when recidivism statistics failed to meet the programs goals. At the time, the research institute that tracked it told WNYC that "the jail was chaotic and it was not uncommon for sessions to be interrupted by lock-downs or other incidents." The program failed, in other words, in the context of a very specific, and very serious, pattern of institutional dysfunction. 

The success of the program is Salt Lake is intended to provide a more replicable template for funding and implementing preschool programs.