This November, the Foundation for Excellence in Education will host its fifth annual National Summit on Education Reform, in Washington, DC. As a first-time Summit attendee and new member of the ExcelinEd team, I am excited to learn about the great work being done across the country to advance student outcomes and meet the leaders at the forefront of this work. Even more so, I am looking forward to one of our strategy sessions, “Big Ideas in Education Funding,” which will explore opportunities for state lawmakers to utilize innovative financing models to improve student achievement. One of the big ideas we will discuss is pay for success financing, also known as results-based financing or social impact bonds, which allow states to leverage private investment to scale up successful educational programs.
As a former state executive budget office staffer, I am very familiar with the struggle for limited resources between competing spending priorities. In response to the deficits of the Great Recession, states made cuts to supplemental academic programs even though they presented potential savings by preventing costly remediation. These programs included preschool, full day kindergarten, and dropout prevention to name a few. With slow revenue growth and rising costs associated with formula driven programs (Medicaid, K-12 and higher education), opportunities to make new investments in supplemental and preventative programs are limited.
Several innovative states and local governments have responded to these circumstances by contracting with private investors to fund successful prevention programs. Pay for success contracts provide the opportunity for government agencies to connect resources from socially-minded investors with service providers that have demonstrated positive outcomes. Through a results-based contract, the state only pays the investor if a rigorous third-party evaluation determines that a predefined outcome has been achieved. This reduces the risk to taxpayers and incentivizes investment in successful programs. The state uses a portion of the cost savings achieved by the contract to pay back the investor with a return.
What’s the catch?
Now, the obvious question is: What’s the catch? It appears that there is virtually no risk to the state in these contracts. Why would an investor take on that kind of risk? Without any mature contracts to learn from, these questions can cause some hesitation for lawmakers considering this type of financing. What I can tell you now is that investors are entering into these contracts and are looking for more opportunities to invest in programs that provide a positive social impact. The first pay for success contract in the United States was established in 2012 between New York City and Goldman Sachs to address juvenile recidivism. Since 2012, pay for success contracts have been established in Colorado, Connecticut, Illinois, Massachusetts, New York, Ohio, South Carolina, and Utah and are in development in several other cities and states. In addition to recidivism, pay for success contracts have been used to address issues such as maternal and child health, homelessness, adult education, and early education.
As a relatively new form of financing, there is still much to learn about the potential uses and benefits of pay for success financing in the education sector. What I find most promising is the inherent incentive for private investors to ensure that funding will only support effective programs that have proven results. I am also encouraged by the opportunities that exist for investment in supplemental support services that are currently competing with each other and with other mandatory formula spending for limited state resources. Some of these programs include dropout prevention, credit recovery, adult education, and postsecondary education retention and completion.
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About the author
Whitney is the State Policy Director of K-12 Funding for the Foundation for Excellence in Education. She previously served as the K-12 budget analyst for Arizona Governor Janice K Brewer where she was responsible for developing the Executive Budget Recommendation for K-12 education. During her graduate studies, she worked in Metro-Nashville Public Schools researching early intervention strategies for math disabilities. She also worked as a research and data analyst in the Nashville Mayor’s Office of Children Youth. Whitney holds a bachelor’s degree in political science from Arizona State University and a master’s degree in public policy from Vanderbilt University’s Peabody College of Education. Contact Whitney at Whitney@excelined.org