Pay for Success – Also Known as Social Impact Bonds, Senator Orrin Hatch & the Every Student Succeeds Act (ESSA)
Seattle Education news
Back in the early 2000’s Sun Microsystems’ Scott McNealy described the pending merger between Hewlett-Packard and Compaq as “the sound of two garbage trucks colliding”.
Whenever I read through the 449 page abomination that is the 2016 re-write of the 1965 ESEA – later rebranded as the ESSA – I can’t help thinking of that phrase.
The law really is a never ending dumpster fire.
Thanks to boastful politicians, like Senator Orin Hatch, the public gets to learn in a round about way some of the awful things tucked into the ESSA.
From July 16th, 2015
Senate Passes Hatch “Pay for Success” Amendment
“With Pay for Success, state and local leaders will be empowered to fund initiatives that deliver real results for their communities and schools. Rather than being limited by what federal bureaucrats at the Department of Education think best, funding should be more connected to local innovation and successful outcomes. I’m pleased the Senate has voted to approve my amendment, which builds on tremendous success leaders have already seen in my home state of Utah.”
What’s Pay for Success?
It’s telling that Hatch’s short statement is full of buzz works like “empowered”, “local innovation”, and “successful outcomes”, but really doesn’t explain what Pay for Success means or more importantly, how it works.
I think this is deliberate.
Pay for Success is an upbeat re-branding of social impact bonds or SIBs.
In the case of the ESSA, social impact bonds are a way for investors to speculate on education outcomes; essentially making bets on programs and then measuring if kids meet these benchmarks – which trigger a payout to investors by the state or local government agency that signed onto the contract.
In Utah, Hatch’s home state, Goldman Sachs and the investor J.B. Pritzker agreed to invest millions of dollars in an expansion of a preschool program in the Granite School District and later the state as a whole.
The payoff for investors would occur if the expansion of preschool to underserved populations cut down on the number of students requiring special education services later in their academic careers.
The bet was preschool would reduce the number of kids in special education based on scores determined by the Peabody Picture Vocabulary Test.
The sell to the school district was the potential savings of $2,600 dollars for every child who didn’t need special education or other remedial services.
The payout plan to Goldman Sacks and J.B. Pritzker is tricky, and makes me wonder if any of the politicians who supported the statewide preschool plan took the time to crunch the numbers and imagine worst case scenarios.
Here’s the terms for The Utah High Quality Preschool Program America’s First “Results-based Financing” for Early Childhood Education.
Determining Pay-for-Success Payments:
— Children participating in the high impact preschool program are given the Peabody Picture Vocabulary Test which is a predictive evaluation that will serve as an indicator of their likely usage of special education and remedial services. Students that test below average and are therefore likely to use special education services will be tracked as they progress through 6th grade
— Every year that they do not use special education or remedial services will generate a Pay-forSuccess payment
— School districts receive a fixed per annum payment of approximately $2,600 per student to provide special education and remedial services for students in general education classrooms from the State of Utah. The amount of the Pay-for-Success payment is based on the actual avoided costs realized by the State of Utah
— Pay-for-Success payments will be made equal to 95% of the avoided costs or $2,470 per child for every year, Kindergarten through Sixth Grade, to repay the senior and subordinate debt plus a base interest rate of 5.0%
— Thereafter, Success Payments will equal 40% of the savings, or $1,040 per child per year of special education services avoided, to be paid as Success Fees to Goldman Sachs and Pritzker
And this disclaimer, which in my mind seems to contradict the point made above. I’m thinking interpretation will hinge on whether Goldman Sachs and Pritzker are making money on their investment at the 7 year mark:
— Pay-for-Success payments are only made through 6th grade for each student; but all savings that are generated after that point will be captured by the school district, state and other government entities.
The New York Times took a look at the first year results of the Utah program and found some troubling issues.
First off, Goldman Sachs reported a payout of $260,000 dollars by claiming their program helped 99% of the students enrolled avoid special education, even though the highest rate of prevention in well funded preschool programs is a 50% success rate. Oh, and the Goldman Sachs program isn’t considered to be well funded.
Goldman said its investment had helped almost 99 percent of the Utah children it was tracking avoid special education in kindergarten. The bank received a payment for each of those children.
The big problem, researchers say, is that even well-funded preschool programs — and the Utah program was not well funded — have been found to reduce the number of students needing special education by, at most, 50 percent. Most programs yield a reduction of closer to 10 or 20 percent.
The program’s unusual success — and the payments to Goldman that were in direct proportion to that success — were based on what researchers say was a faulty assumption that many of the children in the program would have needed special education without the preschool, despite there being little evidence or previous research to indicate that this was the case.
Another problem was the Peabody Picture Vocabulary Test or P.P.V.T. overestimated the kids at risk for special education services, even though this test isn’t really used as a screener for special education in the first place.
Before Goldman executives made the investment, they could see that the Utah school district’s methodology was leading large numbers of children to be identified as at-risk, thus elevating the number of children whom the school district could later say were avoiding special education. From 2006 to 2009, 30 to 40 percent of the children in the preschool program scored below 70 on the P.P.V.T., even though typically just 3 percent of 4-year-olds score this low. Almost none of the children ended up needing special education.
When Goldman negotiated its investment, it adopted the school district’s methodology as the basis for its payments. It also gave itself a generous leeway to be paid pack. As long as 50 percent of the children in the program avoid special education, Goldman will earn back its money and 5 percent interest — more than Utah would have paid if it had borrowed the money through the bond market. If the current rate of success continues, it will easily make more than that. (bold mine)
Did you catch that, if the inflated rate of success continues – which it probably will based on a faulty benchmark not really used to screen for special education – the state of Utah will end up paying MORE than if it had just purchased a bond upfront to fund the preschool initiative.
Talk about selling snake oil to lawmakers who refuse to read the fine print.
Orrin Hatch and Goldman Sachs, Best Friends for Life.
Now that you know the setup and potential pitfalls of these risky investments, here’s some more information pertinent to Hatch’s fondness for social impact bonds.
First, Goldman Sachs is number 15 on Orin Hatch’s top 20 donor list. Second, Hatch has no qualms about going on Fox News to defend Goldman Sachs agains what the Senator claims to be suspicious government inquires into the investment firm’s behavior.
Another interesting aspect to Hatch’s detail-free praise of Pay for Success, was his demonization of federal bureaucrats.
Pay for Success just substitutes one group of bureaucrats for another. In the case of Utah’s preschool program, the bureaucrats come from the United Way, who act as the intermediary between investors and the district.
I find this troubling as well.
Incentives matter on Wall Street and what gets measured dictates the spoils.
Having the United Way run a program like the preschool initiative invites trouble. Who’s interests will be protected, the investors eager for a profit or a child’s right to an education.
By the way, since the United Way is private, they won’t have to answer to parents, school boards, or FOIA requests.
Would children be pressured to show success and be denied special education services? That’s a hard question with no easy answer.
The United Way also seems to be cozy with the U.S. Chamber of Commerce and the Business Roundtable, so meting out some business disciple doesn’t seem out of the range of possibilities.
To sum up, Third Sector Capital has put together a nice graphic which explains how social impact bonds work. Get familiar with the concept. It may be closer to your school than you think.
In my next blog post I’ll explain how some members of the Washington State Legislature see social impact bonds as a way of meeting the funding mandate for McCleary.