Pritzker-led group sinks $16.9 million into pre-K for poor Chicago kids (Crain's Chicago Business)

By Paul Merrion

A group of private investors, led by Chicago billionaire J.B. Pritzker, will invest $16.9 million in an innovative financing scheme that allows Chicago to expand pre-kindergarten programs for more than 2,000 low-income children over the next four years.

If it works, in terms of reducing the future costs of special education and remedial programs, the investors aim to get their money back, plus interest, but at no cost to taxpayers. The financing technique is sometimes called a “social impact bond” or “pay for success” financing.

In this scenario, Chicago Public Schools will get about a third of the savings generated if the program succeeds, with the rest going to pay back investors.

“This is an alternative method of financing something that truly is game-changing,” said Mr. Pritzker, co-founder of Pritzker Group and a scion of one of Chicago's wealthiest families. “If you can intervene with at-risk children at early ages, it truly changes the trajectory of their lives."

Chicago's will be just the fifth social impact bond program in the U.S., an idea that originated in the United Kingdom. It's only the second to focus on early education and the first education-oriented program in a big city. The Chicago initiative is modeled after a pre-K social impact bond program Mr. Pritzker launched last year in Utah. Other social impact bond programs have been aimed at keeping former convicts from returning to prison.

Earlier this year, the state of Illinois launched plans to start a pay-for-success program that is expected to bring in private investments totaling $30 million for programs aimed at helping young people avoid welfare or incarceration, generating savings that can be returned to investors.

The J.B. Pritzker and M.K. Pritzker Family Foundation will invest $4 million in the Chicago project along with Goldman Sachs Group Inc., which is putting up $7.4 million through the Wall Street investment bank's Social Impact Fund, and Northern Trust Corp., which is putting in $5.4 million as part of its community development portfolio. Goldman was Mr. Pritzker's co-investor in the Utah project.

In addition, the project’s loans and repayments will be coordinated by IFF, a nonprofit funding group in Chicago. Metropolitan Family Services, another Chicago-based nonprofit, will work with CPS to get parents involved in the program and provide advice. Yet to be named is an independent evaluator who will analyze data to determine whether CPS and the city owe success payments to the investors.

'PART OF THE WAVE'

The program will cover 374 children in the first year, up to 782 in the next two years and at least 680 in the fourth year. According to the city, this covers more than half of the roughly 1,500 eligible low-income children who currently do not receive pre-K services.

The remaining half will start getting pre-K education in the 2015-16 school year through $9.4 million in additional funding from the city and Chicago Public Schools, plus a $4.5 million state grant, the city also announced on Oct. 7.

“A budget is a reflection of our values as a city. Every child in the city of Chicago should have access to pre-K, regardless of neighborhood or family income,” Mayor Rahm Emanuel said in a statement. “In Chicago, high-quality pre-K and kindergarten is not the exception, it is the expectation. This will provide all of our students with the foundational learning necessary to take them on to college, career, and a successful future.”

Payback to the lenders will depend on demonstrable results in terms of kindergarten readiness, reduced need for special education services and third-grade reading scores.

“This is the first U.S. social impact bond to be looking that far out in terms of its outcomes,” said Jeffrey Liebman, professor of public policy and an expert on social impact bonds at Harvard University's Kennedy School of Government.

“Our goal, ultimately, is that this model in a big city will be successful and replicated throughout the country,” as well as in Chicago again, Mr. Pritzker said. His foundation will take a subordinate lending role, meaning that it will take the most risk by getting paid back over a longer period and only after the other investors are paid back.

“This hasn't swept the nation yet, but this is part of the wave that's coming,” he said, adding that the mayor “has been chomping at the bit to do a social impact bond for early childhood education.”