Pay for preschool success (American Enterprise Institute)

By Katharine B. Stevens


An innovative new approach to results-based public financing called Pay for Success hit an unexpected bump in the road last month. The country’s second Pay for Success project, a preschool program in Salt Lake City, Utah, reported strong results which, after initial acclaim, were heavily criticized for overstating the project’s benefits.

Yet rather than calling the approach into question, the recent debate over Utah’s project actually underscores the value of the outcomes-focused transparency that Pay for Success brings to government spending.

In a Pay for Success approach, private investors provide upfront cash to fund a social program that’s expected to prevent a specific problem from happening and thus save the government money that would otherwise have to be spent down the line. If the project is successful, based on transparent, clearly-measured outcomes, the government pays investors back using the public savings incurred when later remedial costs are avoided. If the project is not successful, investors lose their money and the public pays nothing.

The Utah project was launched in 2013 to help the Granite School District’s nationally-recognized, evidence-based preschool program expand. Developed with the largest-ever federal Early Learning First grant, the program has a strong track record of success, with academic gains for poor children shown to persist into the fifth grade. But it found itself with a waiting list of almost 600 children and no funds to serve them. So the school district partnered with two local non-profits – United Way of Salt Lake City and Voices for Utah Children – to put together a Pay for Success proposal that would enable the program to serve all the children who wanted to attend.

Early childhood education makes sense for the Pay for Success approach because kids who start kindergarten ready to succeed are more likely to avoid expensive remediation. And while good early education has a range of potential long-term benefits, for a Pay for Success project to work, investors’ funding has to be tied to specific, relatively short-term government savings that can serve as the basis for paying – or not paying – the investors back. The Utah project chose reduced special education placement as their “payment metric,” because children who arrive in kindergarten way behind their peers are at much higher risk of being placed in costly special education and often remain there for years.

To determine the basis for paying back the investor – in this case, Goldman Sachs – the project:

  • Assessed the risk of later educational failure for the 595 children funded by the money, using the widely-accepted Peabody Picture Vocabulary Test.
  • While all 595 children funded by the project were from poor families, one of the risk factors associated with special education placement, the 110 children who scored in the bottom 5 percent based on the test’s national average were identified as the highest risk and defined as the target group for determining project repayments.
  • For each of those 110 highest-risk children who did not need special education in grades K-6, Goldman would receive an annual payment set at 95 percent of the special education money saved.

A few weeks ago, Utah announced the project’s successful first results: Of the 110 target children, only one ended up needing special education services in kindergarten, meaning that Goldman received the agreed-on “success payment” of avoided special education costs for 109 children. (Just six of the other 485 children needed special education but, while a positive outcome of the program, this wasn’t included in the payment agreement.)

Yet while those results look good, they were quickly attacked – and not by opponents of preschool, as might be expected, but by education experts who argued that the payment metrics were not supported by research, too easy to achieve and rigged by the bank.

The critics raise valid questions about potentially off-base payment metrics. The target group was defined as likely to need special education, with “likely” defined as 95 percent of that group entering special education in kindergarten. We don’t know what would have happened to those 110 kids without the preschool year, but the assumption that 105 of them would have ended up in special education starting in kindergarten seems open to question. So it’s possible that the bank was paid for some kids who wouldn’t ever have been in special education or not until a subsequent grade.

But here’s the thing: The metrics questioned by the education experts weren’t rigged by the bank. They weren’t designed by the bank. They were designed and vetted by other education experts. So what’s being highlighted here isn’t actually a problem with Pay for Success at all, but a big, usually invisible, problem with the field of education research itself.

As a 1999 National Academies of Sciences report put it: “One striking fact is that the complex world of education – unlike defense, health care, or industrial production – does not rest on a strong research base. In no other field are personal experience and ideology so frequently relied on to make policy choices, and in no other field is the research base so inadequate and little used.”

In the $650 billion K-12 sector, experts rarely ask questions about the research base for education practices, much less resolve them. Indeed, the research base used for the Utah project’s payment metrics is as good as what’s used for most education projects. What’s remarkable about Utah, though, is that in contrast to K-12 business-as-usual, program results are being measured, reported and debated. Improvements can be made going forward. Success metrics can be refined and strengthened. In fact, the recent critiques of Utah’s project actually underscore one of the most important strengths of the Pay for Success approach: bringing rigor and transparency to public sector spending, which usually has neither.

Bumps in the road are expected with any new innovation. Five hundred and ninety-five additional poor children in Salt Lake City got to attend a preschool they wanted to go to, with groundbreaking transparency around results. The nation’s second Pay for Success project may not be perfect, but it’s a big step in the right direction.