Goldman Sachs Makes Investment, Gets Returns on Utah Preschool Program
By guest blogger Sean Meehan
An innovative partnership involving Goldman Sachs, a school district in Utah, and several community charities could expand that school system's early-education program while also saving taxpayers money and earning money for the investment bank.
If successful, the venture would be the first investment of this kind to fund a public school program, according to officials at the investment bank.
Goldman Sachs and Chicago venture capitalist J.B. Pritzker will front the cost of expanding the preschool program at Granite school district, a system of about 67,000 students just south of Salt Lake City. Data indicates that students who go through the preschool program are less likely to need remedial services, or special education. As fewer students require remedial services, the district will save money, which the school system will then use to pay off the loan.
Because early intervention is cheaper than ongoing remedial services, the deal relies on the assumption that the districts' savings will exceed the amount of the loan, allowing the district to pay off the amount it borrows and keep some of the savings. Additionally, by the terms of the loan, Goldman Sachs and the other investors assume the risk—meaning if the savings don't appear, the district will not be compelled to use other funds.
The so-called "social impact bond" is only the second private-sector social impact bond in the country, officials involved in the project say. Social impact bonds, also known as "pay-for-success" loans, are investments in prevention and intervention programs in the public sector that pay for themselves by reducing costs down the road with the goal of producing positive social outcomes.
While data from the district indicates that students who attend the preschool program need less remedial education, the Granite school district to date hasn't had the money to extend the program to serve children on its waiting list. The initial $1 million investment from Goldman Sachs and secondary investor J.B. Pritzker will create more capacity, allowing the preschool to enroll 450-600 new students.
"Our expectation is that this will help dramatically reduce the achievement gap and create a big increase in kindergarten readiness," said Bill Crim, the vice president of collective impact and public policy at United Way of Salt Lake, a long-time supporter of the Granite school district preschool program. Crim served as an intermediary between Goldman Sachs and the district.
Currently, schools districts in Utah pay roughly $2,600 per year for each student who requires remedial services or special education. The district will use the money it saves on these services and repay the loan plus five percent.
If the loan for a particular year is paid off before the students reach sixth grade, then the school will keep 60 percent of the savings and 40 percent will be divided between Goldman Sachs and J.B. Pritzker. This means that the amount of money that the investors can make is tied to how well the program performs. If the program keeps students out of remedial services at a high rate, it will be able to pay off the loan faster and start the 40 percent "success payments," which will be paid to the investors until the students complete sixth grade.
"The basic idea is to take a proven operator with a proven program, have investors pay to expand that program. We can track the impact of [the program] to the kids and tie repayment of investors to that actual performance," said John Goldstein, the managing director of Imprint Capital, who acted as investment advisers to Pritzker.
Initially, the United Way and the Granite school district hoped to use state special education funds to expand their preschool program. However, a bill proposed by state Sen. Aaron Osmond that would free up state funding for results-based early childhood education like the Granite preschool program failed a Senate vote in March. The measure will go up for a vote again next January. For now, though, Goldman Sachs and Pritzker have decided to go ahead with the deal anyway, with help from the United Way and Voices for Utah Children, a charity that focuses on health, school readiness, and other issues.
The agreement was originally authored by Janis Dubno, a former investment banker and current senior policy analyst at Voices for Utah Children.
"United Way really stepped up and said this is important," Goldstein said. "Goldman Sachs had put a lot of time and had the expertise to be flexible and creative to make it happen. So the core partners stayed at the table and said let's come up with a Plan B."
Part of the reason that government support was lacking was that social-impact bonds have only existed since 2010, when they were first used in England, and cash-strapped state governments are hesitant to invest in something unfamiliar. Goldman Sachs, however, is confident that the model will work.
"This is a new way for governments and funders to think about doing business based on outcome," Andrea Phillips, a vice president in Goldman Sachs's Urban Investment Group, said. "We think it's an innovative approach that is compelling."
Goldman considers the investment a "double-bottom-line investment," which means it aims to have a positive social impact and a financial return, Phillips said. This case may have a triple-bottom-line, she argued: Students will be better prepared for school, the district will save money, and the investors will earn a financial return.
Investors Goldman Sachs and J.B. Pritzker and facilitators United Way of Salt Lake and Voices for Utah Children all pointed to the same two factors that made the deal possible: having a high-quality preschool program already in place, and having a wealth of data showing the program's success.
"All the rest of us are useless appendages unless there's someone who is really good at what they do and has data on its effectiveness," Goldstein said. "It really all starts with that."
Much of the data was collected by Voices for Utah Children, which has been tracking four cohorts of kids in the preschool.
Backers of the Utah venture believe it is the first social-impact bond in the United States focused on early childhood education. They say they want to demonstrate the effectiveness of the model so that others in education and in finance could consider similar projects.
"One big goal is proving that you can form public-private partnerships and put investment capital to work early on," said Crim, of the United Way, as well as "proving that the taxpayers benefit down the road."