A New Way to Finance Early Childhood Education

Financial instruments and preschoolers don't seem like an obvious match, but one stemming from an innovative pairing of the public and private sector offers a promising way to expand access to early education for at-risk children.

Social impact bonds, sometimes referred to as results-based financing, are a new financing tool that uses private capital to achieve positive social outcomes while simultaneously generating cost savings for local governments and financial returns for investors.

Today, Goldman Sachs, United Way of Salt Lake and the Early Childhood Innovation Accelerator (an initiative created by J.B. Pritzker) formed a partnership to create the first-ever social impact bond designed to finance early childhood education. Together, Goldman Sachs and the Accelerator are making a loan commitment of up to $7 million to fund the expansion of the Granite and Park City School Districts' high-quality preschool program for at-risk children in Utah. The program uses a structured curriculum to better prepare children for kindergarten and decrease the use of special education and remedial services in elementary school, resulting in cost savings for the state and the school district. The first $1 million investment will enable an additional 450 children to attend pre-school this fall. As the success of this approach is demonstrated, we expect public entities that realize cost savings as a result of the program will want to join this unique partnership.

To date, the preschool program has been successfully implemented in the Granite and Park City School Districts, yet many children remain on waiting lists. In a study conducted between 2006 and 2009, the preschool program successfully intervened to ensure that 95 percent of children who tested as likely to need special education services entered school ready to learn and did not need long term remediation services. Based on the historic success of the program, our partnership got comfortable with providing financing to expand the current program to reach up to 3,700 three and four year olds that are at high risk for starting kindergarten behind their peers.

The benefits of investing in early childhood education are clear: at-risk children who participate in early education programs are more likely to enter kindergarten ready to learn, setting them on a path for success during their school years and beyond. Research has shown that investments in children age five and younger improve school readiness and decrease crime, teen pregnancy, delinquency and substance abuse. More broadly, high impact preschool has proven to have long term benefits through the middle school years, including higher rates of high school graduation. These better outcomes for young people also yield substantial cost savings to state, local and the federal government.

And yet, despite broad consensus about the value of early childhood education and the overwhelming research, many children never have the opportunity to attend. The challenge is how to provide high-quality preschool to more children during an era of diminished government resources.

The $7 million that Goldman Sachs and the Accelerator are committing is an investment. As investors, we will only get a return of principal and interest on our loan if the preschool program is successful in preparing children to start kindergarten and reducing the number of children that need special and remedial education. If the preschool program is ultimately unsuccessful, public and other funders will not pay anything; if it is, taxpayers will yield net savings beyond payments to investors. As a result, this is a "double bottom line" investment: it makes sound financial sense and will make a social impact.

We believe this model holds promise because it is scalable, replicable and sustainable. It provides a new framework for thinking about how the public and private sectors can work together to address pressing social needs in a way that results in better outcomes for children, alleviates some of the financial burden on taxpayers and generates savings for governments.