By Hal Dardick and Juan Perez Jr.,
Mayor Rahm Emanuel's administration plans to use an emerging form of financing, one that links payback to lenders on the success of the initiatives being funded, to expand early childhood education programs in Chicago.
The mayor's office said Tuesday that it will use close to $17 million of what are known as "social impact bonds," in addition to $4.5 million in state funds and about $10 million in capital improvement money from next year's budget, to enroll more low-income children in pre-kindergarten over the next four years.
The social impact bond funding would cover the enrollment over four years of about 2,600 children into a half-day Child-Parent Center preschool program. Expected to launch in November, the program would enroll 374 students this year at six schools that now are dealing with a shortage of preschool seats.
In the second and third years, the program would expand to more schools with places for 782 children each year, and 680 students in the fourth year.
More students would be enrolled with the state and capital improvement funding starting next school year.
Emanuel has promoted access to preschool education as central to his education initiatives, although critics have accused him of not doing enough. The plan to borrow money to expand those programs comes amid increasing borrowing to cover city operating expenses, but Emanuel said the choice was clear.
"If you don't make this investment, you'll be borrowing other money to pay other expenses, both for failure on the educational side," the mayor said. "Or, God forbid, but other potential as it relates to dropouts and all the consequences there."
"This is a very good preventive expense and investment that gives you proven track records to be much more effective at keeping kids on track for graduation and all the positives that come with that, versus all the consequences of not."
Social impact bonds, sometimes called "pay for success" bonds, are relatively new to the United States, having been pioneered in the United Kingdom. They are touted by the Center for American Progress, a think tank closely allied with the administrations of former President Bill Clinton and President Barack Obama, and the conservative American Enterprise Institute. Obama has backed the concept at the federal level.
Loans made through social impact bonds are only paid back if the program's targets are met. In this case, the city's children will need to reach specific educational benchmarks. Such attainments would be expected to reduce the future costs of special education and making sure students are ready for kindergarten and able to meet third-grade literacy standards.
Those anticipated savings would be used to cover the costs of the bonds.
The primary lenders are the Goldman Sachs Social Impact Fund and Northern Trust financial services firm. The J.B. and M.K. Pritzker Family Foundation is listed as a subordinate lender. The bonds would be issued with each incoming class of preschool students, and each set would be for 14 years, or the presumed duration of their public school education.
The bonds require approval by the City Council and also an agreement with the Chicago Board of Education. Officials said that if no money is saved as a result of the preschool initiatives, no payments will be due back to the lenders.
Although the programs would be run by CPS, three nonprofit groups — IFF (formerly the Illinois Facilities Fund), the Finnegan Family Foundation and Metropolitan Family Services — would coordinate, fund and evaluate the program to ensure it's reaching its target audience and meeting its goals.
City officials said that the city will pay about the same interest rates as they would for more traditional financing mechanisms. They said they don't expect those rates to top 8 percent.
Emanuel's office said payments to lenders would come from CPS savings of $9,100 — compounding at an annual interest rate of 1 percent — for each student who avoids special education after attending the Child-Parent Center program.
An additional $2,900 would be saved for each student deemed ready for kindergarten after attending the program, and a $750 for each student that scores above the national average on a third-grade reading test. Savings beyond the money needed to pay off the bonds would be kept by CPS.
IFF is currently negotiating with an organization that was not identified by the city to serve as an independent evaluator for the project, Emanuel's office said. The evaluator will be responsible for statistical analyses of the program's outcomes; those findings will trigger "success payments" to lenders from the city and school district.
"If the project is not successful, the city does not pay, so they are really transferring the risk back to the investors," said Andrea Phillips, a Goldman vice president.