A proposal from Mayor Rahm Emanuel to expand early childhood educational opportunities was approved by the City Council Finance Committee Monday, even as it was revealed the method for funding the expansion could wind up being a financial windfall for investors and drawing comparisons to the much-maligned parking meter privatization deal.
Last month Emanuel proposed expanding Chicago Public Schools’ Child-Parent Center preschool program by 2,618 children over the next four years through the use of a pay-for-performance financing plan called “social impact bonds.” These bonds are $17 million in loans from the Goldman Sachs Social Impact Fund, Northern Trust and the J.B. and M.K. Pritzker Family Foundation. But Chicago Chief Financial Officer Lois Scott said during budget hearings investor returns would be based on three separate student performance benchmarks from kindergarten through third grade. The rate of return would be 6.3 percent, meaning the lenders could reap up to $34.5 million in repayments by the city over the next 18 years if the children in the program meet the testing standards. Scott said this was a win-win for the city.
“Every single payment to the investors depends on whether the children have been helped. If children do not benefit from the program, the investors get nothing — not even their money back.”
But the prospect of a group of bankers making money on a city program that’s been in place for decades doesn’t sit well with some aldermen and other critics. Ald. Scott Waguespack (32nd) said the program “is basically privatizing Head Start.”
“Head Start has been proven to work for decades…. It reminds me of the parking meter deal. The same type of people came in and said it was a high-risk asset [when] it was a low-risk asset...We lost billions of dollars. We’re not gonna lose billions here. But, taxpayers under this scheme are gonna pay a lot more than if we just went out and re-allocated resources we already have.”
Chicago Teachers Union policy researcher Kurt Hilgendorf concurred.
"This is a very similar structure to the parking meter deal, to the Infrastructure Trust. These complex financing schemes result often in less efficient delivery of public services."
But Scott maintained the bond program is good if it means getting more kids in the program, because there is little risk to the city.
"That's a little bit higher than where they would finance on a general obligation basis, but there's no taxpayer dollars at risk that way," she said. "This puts all the risk on the investors. … So I would consider that an attractive financing rate."