Show me the money

Innovative finance model could provide new path for early childhood services

It was the fall of 2010, and the finance task force of the Early Childhood Council of Boulder County had worked for the better part of the year to come up with the dollar amount needed to provide high-quality early childhood services to every child in the county.

But after the task force finally nailed down the number, they never released it publicly.

“The number was so big, they were afraid it would terrify the community,” said Bobbie Watson, executive director of the council.

With the recession hitting, the board knew better than to ask voters for a tax increase, much less one capable generating the many millions of dollars the task force anticipated was needed.

Fast forward to November 2013 and the ballot box defeat of the school finance measure Amendment 66, which would have made possible universal full-day kindergarten and thousands more preschool slots for at-risk children. With that funding opportunity gone, Watson and her board quickly decided to pursue an innovative financing model they’d begun to explore.

Called “Pay For Success,” or PFS, it had bubbled up in policy circles for a few years, but is largely untested.

The idea behind the model, which is also sometimes called “Social Impact Bonds” or “Results-Based Financing,” is that private investors—commercial banks or foundations–pay upfront for evidence-based programs, such as high-quality preschool.

In turn, the programs prevent costly interventions such as grade retention or the use of special education services during the child’s K-12 career. If the school district or state realize the expected savings from reduced special education or grade retention costs, the investor is repaid with interest. Thereafter, the district or state reaps any additional savings.

While there are no active Pay For Success programs in Colorado, the concept is gaining traction. The city of Denver and the state now share a fellow from Harvard University’s Social Impact Bond Technical Assistance Lab whose job is to evaluate possible PFS projects. In addition, the Rose Community Foundation has convened a group of about 20 Colorado foundations for ongoing discussions about how they might facilitate or fund Pay For Success projects in early childhood.

Watson, who with her board has hired consultants to lead the Pay For Success planning process, said, ““We’re not talking about this. We’re doing this…This is the only option we see on the horizon that will bring millions of dollars into the birth-to-five space.”

Skepticism, then excitement

If Pay for Success were a child, it would still be in preschool. It was launched first in England in 2010 with a program aimed at reducing recidivism—and thus the high cost of prison stays–by helping freed inmates transition back into their communities

While there are a number of Pay For Success programs in the works around the world, fewer than 10 are actively running. Just one of those—in Utah’s Salt Lake County—focuses on early childhood. In New York, projects focus on adult and juvenile recidivism and in Massachusetts they address recidivism and chronic homelessness. A health care-based program launched last year in Fresno, Calif., aims to cut emergency room visits by low-income children with asthma. None of the programs have reached the pay-out phase yet.

Mary Wickersham, who is one of the consultants working for the Early Childhood Council of Boulder County, said a state senator first proposed a PFS-like concept to her in 2008 when she worked in the state treasurer’s office.

“At the time, I was extremely dismissive,” she said. “It just seemed horribly impossible to me.”

But proponents of the idea, including U.S. Rep. Jared Polis, a Democrat who formerly served on the State Board of Education, kept talking about it and policy-makers, foundations executives and law-makers started listening. Wickersham, director of the Center for Education Policy Analysis at the University of Colorado Denver, is now part of several efforts to move Pay For Success forward in Colorado.

“It’s been an idea that’s really exploded over a short period of time,” said Wickersham.

Part of the appeal of PFS in the early childhood realm is that there’s already a large body of evidence demonstrating the positive outcomes that stem from effective early childhood programs. Because those positive outcomes — from improved school performance to lower unemployment — help save the government money, the idea of staking a claim on those future savings to expand programs now seems to make sense. In fact, many in the early childhood community believe PFS has the potentional to address what they see as chronic underfunding of important early childhood programs.

“In early childhood, [the lack of funding is] even worse than the K-12 education system, if that’s even possible,” said Elsa Holguin, the senior program officer at the Rose Community Foundation who’s leading the coalition of foundations interested in PFS.

Aside from federal child care subsidies and targeted programs like the Colorado Preschool Program, “there’s not a really robust financing mechanism for comprehensive early childhood programs,” said Karen Rahn, director of the Boulder County Department of Human Services.

She believes PFS is a promising finance tool as well as “a way of bringing stakeholders together around an issue.”

Nuts and bolts

Pay For Success deals are complicated transactions that may involve eight or more partner organizations, including investors, government entities, service providers, account managers, evaluators, and an “intermediary” whose job is to recruit investors and manage the overall program. Such projects also require extensive planning and number-crunching to determine the target population and intervention that will provide the savings needed to make the concept successful.

In a hypothetical example, an investor pays a school district to create 500 new preschool slots for low-income children in the hopes of preventing the students from repeating third grade. The contract would establish  specific performance targets that would need to be achieved for that cohort at the end of third grade, or approximately five years after the start of the PFS project. If the outcomes do not materialize, the school district would not have to pay back the investors.

Under Utah’s PFS deal, launched last summer, private investors will provide up to $7 million to pay for thousands of new preschool slots for low-income three- and four-year-olds over the next several years. The program is based on data that shows children who attend high-quality preschool are less likely to be identified for costly special education services once they start elementary school. Because children rarely discontinue special education once they are found eligible, reducing their chances of needing services can yield a huge cost savings over the course of a 13-year school career.

Janis Dubno, a Wall Street banker-turned-children’s advocate, started some of the early work on what’s called “The Utah High Quality Preschool Program” in 2010 and said the process required much collaboration among partners. Among them were  two school districts, the local United Way, a local community foundation, Salt Lake County, a children’s advocacy organization, an investment firm and two private investors—the bank Goldman Sachs and Chicago philanthropist J.B. Pritzker.

“We were all aligned with what we wanted to achieve,” she said.

Even so, there were stumbling blocks. Legislation that would have enabled Utah’s state government to participate in the deal failed last year and leaders of the PFS effort had to settle for a one-year “proof of concept” approach under which the United Way and Salt Lake County contributed to a repayment fund instead of the state.

“A lot of people in the legislature couldn’t get their heads around this financing mechanism,” said Dubno, a senior policy analyst for the advocacy organization Voices for Utah’s Children. “There was a lot of convincing to do.”

Those efforts paid off this year with the passage of the enabling legislation. It was signed into law on Tuesday.

Movement in Colorado

In Boulder County, the early childhood council will work with its consultants over the next year to determine what type of PFS pilot would work best there. It could be an expansion of an existing preschool program, a home visiting program for families with young children, or something else, said Watson.

“It’s investing in our current capacity and just expanding the bandwidth,” she said.

Boulder County isn’t the only one considering Pay For Success right now. A number of other organizations also crafted PFS proposals last fall in response to a “Request For Information” by the state. All told, 43 proposals came in, with 12 of those focused on early childhood , 14 on disconnected youth,  five on homelessness, four on health and even one on forestry.

Among the early childhood respondents were big players like Mile High Montessori and Clayton Early Learning as well as smaller organizations like the two-employee Adams County Youth Initiative. Tyler Jaeckel, the PFS staff member shared by the City of Denver and the state, said the next step in the process is determining the feasibility of the proposals and building the partnerships that would be required to launch them.

One promising proposal came from the Merage Foundations, which proposed an expansion of an existing program called “Early Learning Ventures” that helps small, independent child care providers band together in “alliances” to achieve economies of scale when it comes to business and administrative functions. Sue Renner, the foundations’ executive director, said the program already shows a return of $8 for every $1 invested, has cut state costs for processes like licensing, and has given providers more time and money for quality improvements.

“We know we’re on to something,” she said. “How do we make sure we can scale this and do more of this work?”

While Merage, Boulder’s Early Childhood Council and other interested parties will have to spend months more on data collection and analysis before launching Pay For Success in the state, some observers believe it won’t be a theoretical discussion for much longer.

“It’s in the early stage, but this is going to move fast,” said Holguin. “My goal is let’s position Colorado…to be part of this national wave.”

Not without challenges

While PFS has an enthusiastic cadre of supporters, it has its skeptics too. Some worry that it could represent the privatization of social programs. Others wonder about the intentions of corporate banks that might serve as investors and question whether they should be making a profit off social programs.

Jaeckel said the privatization concern isn’t warranted because PFS money funds non-profit providers or government entities that are already providing services. As for concerns about corporate motives, he noted that commercial investors may care about the social good and see investments in early childhood PFS projects as a way to ensure a quality work force down the road. In Colorado, he added, key PFS investors are more likely to be foundations than Goldman Sachs-type companies.

While investors do earn interest through PFS deals–if the desired outcomes are achieved– the rates are not particularly lucrative. Typically, foundation investors might only get a return of around 2 percent and commercial investors might only get a risk-adjusted rate of around 4 percent, said Jaeckel.

Besides concerns about corporate profits, advocates of PFS initiatives may also have to grapple with the same public perception problems that have sometimes derailed early childhood proposals seeking funding through traditional means.

Pamela Harris, president and CEO of Mile High Montessori in Denver, said, “There’s…this cultural piece that the majority of people think kids should be at home with their moms.”

On top of that is the challenge of getting the public, which may be familiar with K-12 per-pupil costs of around $6,600 a year, comfortable with the higher price tags that often accompany early childhood programs. For example, Harris said, a comprehensive, high quality preschool program can run $9,500-$15,000 a year.

“The cost of quality early education is really high and…that’s been shocking for people.”

Standing alone

New report blasts Colorado for allowing tiny districts to net more school funding by breaking away from larger districts

A new national report on school districts that break away from larger districts criticizes Colorado for incentivizing that path in rural Yuma County.

While the report from the nonprofit EdBuild spotlights a number of districts nationwide that have seceded from larger urban districts to avoid racial and socioeconomic integration, the motivation in Yuma was getting more school funding for tiny rural communities.

In 2001, two school districts on the Eastern Plains — East Yuma and West Yuma — split into four smaller districts: Yuma, Wray and the much smaller Idalia and Liberty. Voters approved the splits in 2000. The idea was to secure more state funding by taking advantage of a new law, pushed through by the local state representative, that would give extra dollars to small districts created by boundary changes approved in that year’s election. (Normally, small districts created by such splits aren’t entitled to more state money.)

PHOTO: EdBuild

The plan worked, netting big per-pupil increases for Idalia, which has about 225 students, and Liberty, which has about 80. In the 2016-17 school year, Yuma and Wray received around $5,500 in state funding for each student while Idalia received about $10,000 and Liberty received about $9,100, according to the Colorado Department of Education.

An East Yuma school board member said before the split, “It would have been nice if [the state] could have provided funding without splitting us, but there was no other way.”

The 2000 Westword story that quoted the board member also described how at first the legislation allowing an exception for districts like those in Yuma County seemed destined to fail. Some lawmakers instead proposed that the Idalia and Liberty schools be closed. But testimony from a fifth-grade girl who’d have a longer bus ride if her Idalia school closed helped put the proposal back on track.

For the small communities that felt shortchanged when they were part of larger districts, the new law provided a major financial boost. But the authors of the EdBuild report argue that it was misguided state policy.

They say the Yuma splits created new duplicative bureaucracies and waste state taxpayers’ money.

By “rewarding small size, Colorado is incentivizing poor financial management, throwing good money after bad and dividing communities along the way,” write the authors.

The report, released Wednesday, is called, “Fractured: The Breakdown of America’s School Districts.

Detroit Journalism Cooperative

Restrictions on teacher pay in Detroit schools can scare away applicants — and make it hard to fill 260 classroom positions

PHOTO: Erin Einhorn
Kindergarten teacher Stefanie Kovaleski of Bethune Elementary-Middle School is one of many teachers who could take a major pay cut when her school returns next year to Detroit Public Schools Community District if she doesn't get credit for her years of experience.

This story is published in partnership with Bridge Magazine, part of the Detroit Journalism Cooperative.  

In Detroit, as many as 260 classroom teacher positions are unfilled in the state’s largest district, prompting a shortage so severe that substitutes last year were the full-time solution in more than 100 classrooms.

And with fewer new teachers are graduating from college every year, pressure is mounting to find qualified teachers. The situation has left teachers working harder in overcrowded classrooms for underwhelming pay –  they’ve seen their pay frozen and cut repeatedly in a district that’s beset with problems both financial and academic.

Yet in the face of a supply and demand problem, the Detroit teachers, like their peers in numerous Michigan school districts, have bargained for contracts that severely restrict the pay of the folks who could help alleviate the shortage.

In Detroit, Dearborn and Roseville, new teachers can only get credit for two years’ experience they accrued working in other school districts. In Grand Rapids it’s five years, in Lansing it’s eight.

It’s difficult to gauge whether the restrictions affect teacher recruitment because they may scare away potential applicants. But for those who are considering a move, the impact is huge.

Say you’re a teacher with 10 years’ experience at Utica schools, which had layoffs last year. To work in Detroit, you’d have to accept nearly $36,000 less, going from more than $78,500 to just under $43,000 because eight years’ of experience wouldn’t count.

Detroit already pays less, with teachers topping out at $65,265 after 10 years, compared with well over $78,000 in most districts. But the restriction put in place by the teachers –  and agreed upon by the administration –  makes that cut even more steep.

Union rules

In a number of Michigan school districts, teachers have negotiated to limit the pay of new hires, ensuring they cannot get full credit for prior teaching experience. In other districts, those decisions are left to the administration. In most cases “max pay” refers to salaries of teachers with master’s degree plus 30 additional hours of graduate education who have the maximum number of years of experience. Below are the 25 largest districts in the state. The restrictions were more common among the 21 districts that surround Detroit, with more than half calling for limits on credit for teaching experience.

District Maximum years of credit Years to top of scale Max pay
Detroit 2* 10 $65,965
Utica full 11 $89,563
Dearborn 2* 18 $82,006
Plymouth-Canton 5* 14 $81,049
Ann Arbor full 11 $80,769
Chippewa Valley full 12 $89,443
Grand Rapids 5* 12 $68,042
Rochester full 20 $86,420
Warren Consolidated full 12 $94,700
Walled Lake full 15 $90,362
Livonia 7 12 $84,595
Troy full 14 $92,400
Kalamazoo full 25 $76,881
Wayne-Westland 3* 14 $76,839
Lansing 8 22 $76,850
L’Anse Creuse full 16 $84,386
Farmington 4* 11 $86,830
Forest Hills full 28 $84,590
Traverse City full 20 $74,819
Waterford 8 15 $78,351
Huron Valley 5* 17 $75,915
Port Huron full 13 $69,831
Kentwood full 26 $80,403
Portage full 30 $88,808
Grand Blanc full 12 $73,588

*In some cases, the union contracts allow districts to acknowledge additional years of experience.

Source: Collective bargaining agreements

There’s little wiggle room because the collectively bargained contracts set salaries exclusively by experience and education. Critics say the restrictions put teachers’ interests ahead of students.

“School districts that want to attract the best teachers… for their students would not want these kinds of policies,” said Ben DeGrow, director of education policy at the Mackinac Center, a free-market think tank based in Midland. It has been frequent critics of teachers’ unions.

Ivy Bailey, president of the Detroit Federation of Teachers, said the language has been in the contract for years and acknowledges those teachers who’ve suffered through years of pay cuts and freezes.

“You have teachers who stayed here and endured it all,” she said. “They care about the children and they’ve stuck it out.”

Bailey said the contract allows the district more latitude when trying to hire teachers in critical areas such as special education. Those specialty areas can salary credit for up to eight years’ experience.

But if it’s not in a critical area, no dice. And that’s been a problem for principals wanting to fill vacancies such as Jeffrey Robinson, principal at Paul Robeson Malcolm X Academy on Detroit’s west side.

“On three separate occasions, we got people who got past the onboarding process, right to the point where they were ready to sign the contract. Then they took a better offer because the salaries are just not competitive,” Robinson told Detroit Journalism Cooperative reporting partner Chalkbeat Detroit recently.

Despite the obstacles in pay and a push by officials some to consider uncertified teachers, district spokeswoman Chrystal Wilson said the district “is committed to hiring certified teachers.”

Detroit is not the only district with restrictions. They are found in union contracts at districts large and small, wealthy and poor, urban and suburban and are the result of the anger stemming from pay cuts and freezes that have taken a huge chunk out of the earning power of teachers who have worked for years in troubled districts.

Not found everywhere

Bailey said it’s common for teachers who change districts to get less than full credit for their experience.

“We can’t do it when we go to another district, either,” she said. “Nobody’s going to give you all of your time.”

But a survey of teacher contracts from more than 40 districts around the state show that many allow district administrators to grant full credit.

In  Ann Arbor, Kalamazoo, Ferndale, Warren Fitzgerald, Warren Van Dyke, South Redford, Utica and others, a teacher could jump to the top of the scale without the teachers union contract prohibiting it.

In the Grosse Pointe schools, which pays among the best in the state, new teachers can be hired at the 13th of a 14-step salary schedule.

Yet in other places, teachers have put the brakes on salaries. Those that have are communities suburban and urban, wealthy and poor. In Oak Park, just north of Detroit, the teachers’ contract has a provision that says all new hires should be hired at beginners’ wages.

Hiring at higher levels “puts financial pressure on the district and creates an environment which disenfranchises staff currently restricted by contractual step freezes,” according to the contract.

The Walled Lake schools in Oakland County, the 10th largest district in the state, had restrictions in prior contracts. But the union agreed to take them out a few years ago even though they continue to encourage the district to hire teachers at as low a step as possible.

Still, the union recognized the need to give the district more flexibility.

“It makes it really hard to have one blanket policy for every opening,” said Daryl Szmanski, president of the teachers’ union in Walled Lake. “As a teacher shortage looms, it’s going to be harder and harder to get good candidates.”

To be sure, restrictions on teacher pay for outsiders is hardly the only factor in teacher shortages in parts of the state. It’s difficult to say if it’s even a major factor. Stagnant state funding for education, a steep drop in enrollment in teacher preparation programs, and sometimes harsh public and political rhetoric directed toward public education almost certainly also play a role in the shortage. So too, there are far fewer substitute teachers available to fill in when permanent teachers are absent.

But for unions, the teacher shortage presents two bad choices: Be unhappy about crowded classrooms or be unhappy that new teachers make more money.

For the Mackinac Center’s DeGrow, the decision should be easy: Door No. 2.

“This kind of policy is just an obstacle for getting the best talent in the classroom,” DeGrow said. “The kids (in Detroit) are already as a disadvantage. Why would we want to make it harder to bring qualified teachers in?”

Need ‘best teachers’

Brad Banasik, director of labor relations for the Michigan Association of School Boards, said he’s not heard complaints about the contracts, but noted that he thinks “administrators would like the ability to hire some on the higher step (pay level).”

Some unions agree. Doug Hill is a veteran teacher who’s now president of the Rochester teachers’ union in Oakland County and he said he’s aware of the painful cuts at other districts.

Hill’s union decided in a recent negotiation to remove a restriction on pay for counselors who held teaching certificates. The district had seen positions go unfilled but now can hire teachers in at whatever level experience they want.

“I can see both sides of this,” Hill said, but added “we’re trying to get the best teachers to put in front of students.”

Union officials say they asked for –  and got –  the restrictions because they say without it their veteran teachers would be demoralized by having new hires, who had not endured the same pay cuts and freezes, make more money doing the same work.

It would be hard to determine how often these provisions have hurt districts like Detroit and Dearborn. If  teachers know they’d have to take a $20,000 or $30,000 pay cut, would they even apply? And they’d likely know: All Michigan districts are required to post their teacher contracts online; Bridge did its survey using this easily-to-access information.

“I think they’re very aware of what’s out there,” Rochester’s Hill said.

For Detroit and other districts, that may be a problem.

This story originally ran in Bridge Magazine on June 15, 2017.

To focus on community life and the city’s future after bankruptcy, five nonprofit media outlets have formed the Detroit Journalism Cooperative (DJC).

The Center for Michigan’s Bridge Magazine is the convening partner for the group, which includes Detroit Public Television (DPTV), Michigan Radio, WDET, Chalkbeat, and New Michigan Media, a partnership of ethnic and minority newspapers.

Funded by the John S. and James L. Knight Foundation and the Ford Foundation, the DJC partners are reporting about and creating community engagement opportunities relevant to the city’s bankruptcy, recovery and restructuring.