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.”

overruled

Lawmakers take first step to ease testing burden for young English language learners

PHOTO: Helen H. Richardson/Denver Post
Justin Machado, 9, reads on his iPad during his 3rd grade class at Ashley Elementary in 2015.

State lawmakers from both political parties are seeking to undo a controversial State Board of Education decision that called for schools to test thousands of Colorado’s youngest students in English — a language they are still learning.

House Bill 1160 cleared its first legislative hurdle Monday with unanimous support from the House Education Committee.

The bill would allow school districts to decide whether to use tests in English or Spanish to gauge whether students in kindergarten through third grade enrolled in dual-language or bilingual programs have reading deficiencies.

The bill is sponsored in the House of Representatives by Reps. Millie Hamner, a Frisco Democrat, and Jim Wilson, a Salida Republican.

If the bill becomes law, it would overrule a decision by the State Board of Education last year that required testing such students at least once in English. That meant some schools would need to test students twice if they wanted to gauge reading skills in a student’s native language.

Colorado’s public schools under the 2012 READ Act are required to test students’ reading ability to identify students who aren’t likely to be reading at grade-level by third grade.

The bill is the latest political twist in a years-long effort to apply the READ Act in Colorado schools that serve a growing number of native Spanish-speakers.

School districts first raised concern about double-testing in 2014, one year after the law went into effect. The state Attorney General’s office issued an opinion affirming that the intent of the READ Act was to measure reading skills, not English proficiency. The state board then changed its policy to allow districts to choose which language to test students in and approved tests in both English and Spanish.

But a new configuration of the state board in 2016 reversed that decision when it made other changes in response to a 2015 testing reform law that included tweaks to early literacy testing.

The board’s decision at the time was met with fierce opposition from school districts with large Spanish speaking populations — led by Denver Public Schools.

Lawmakers considered legislation to undo the board’s decision last year, but a committee in the Republican-controlled Senate killed it.

Capitol observers believe the bill is more likely to reach the governor’s desk this year after a change in leadership in the Senate.

Some members of the state board, at a meeting last week, reaffirmed their support for testing students in English.

Board member Val Flores, a Denver Democrat who opposed the rule change last year, said she opposes the bill. In explaining her reversal, Flores said she believes the bill would create a disincentive for schools, especially in Denver, to help Spanish-speakers learn English.

“If the district does not give the test in English, reading in English will not be taught,” she said.

Board member Steve Durham, a Colorado Springs Republican, said he still believes the intent of the READ Act was to measure how well students were reading in English.

“I think this is a serious departure from what the legislature intended initially,” he said last week. “The READ Act had everything to do with reading in English.”

Hamner, one of the sponsors of House Bill 1160, also sponsored the READ Act in 2012. She disagrees with Durham and told the House committee Monday that the intent was always for local school districts to decide which language was appropriate.

“We’re giving the local educators and districts the decision-making authority on what’s best for the students,” she said.

Multiple speakers on Monday said the requirement to test native Spanish speakers in English was a waste of time and money, and provided bad information to teachers.

“A teacher who teaches in Spanish will not be able to use data from an English assessment to drive their instruction, much like a hearing test would not give a doctor information about a patient’s broken arm,” said Emily Volkert, dean of instruction at Centennial Elementary School in Denver.

The bill only applies to students who are native Spanish speakers because the state has only approved tests that are in English and Spanish. Students whose native language is neither English nor Spanish would be tested in English until the state approves assessments in other languages.

“The question is can you read and how well,” said bill co-sponsor Wilson. “We’re trying to simplify that.”

Funding & Finance

Indianapolis Public Schools may ask taxpayers for more money. A three-year deficit and raises for teachers are driving the decision.

PHOTO: Dylan Peers McCoy
Indianapolis Public Schools leaders may ask the public for more funding.

With Indianapolis Public Schools slowly burning through its savings, district leaders may soon ask taxpayers for more money.

For the third year in a row, the district expects to operate at a deficit, following years of declines in state funding and growing spending on teacher pay. Now, to balance the budget, some district leaders say IPS may need to ask taxpayers for more money through a referendum.

It will be more than a year before the district can put a referendum to increase property taxes on the ballot, said Superintendent Lewis Ferebee. But with state funding stagnant or declining, Ferebee said that he believes the district will “absolutely” need to have a referendum for more funding to pay teachers at the current rate and potentially increase pay in the future.

In recent years Indiana schools have become largely reliant on state funding for operating expenses, with local money primarily paying for transportation and facilities. But districts with pinched budgets often appeal directly to residents to increase property taxes and send more money to schools. Of the 11 school districts in Marion County, eight have asked taxpayers for more funding to pay operating expenses such as teacher salaries and six were successful. The most recent district to make an appeal was Washington Township, which passed a referendum last fall.

Next year, IPS expects to spend about $22 million more on operating expenses then it receives in state, local and federal dollars. The district can make up for that gap in the short-term because it has about $57 million in savings, and it is adding millions of dollars to its coffers each year from the sale of unused buildings. But neither strategy is sustainable in the long term.

“We know we have deficits,” said Weston Young, the district’s chief financial manager. “Ultimately, much like a lot of the other local districts and state districts, an operating referendum is very much a consideration for our district.”

Before district leaders appeal to voters for more cash, however, they are aiming to cut some of the costs that are weighing down the shrinking district — which has lost thousands of students over the last decade. The biggest drain are the district’s underused schools. The district has nearly three times as many seats as there are high school students to fill them, which dramatically pushes up costs at some schools.

(Read: Empty hallways, higher costs force Indianapolis Public Schools to consider closing high schools)

Last summer, IPS leaders announced plans to close some of the district’s high schools. Ferebee said last week that the district could close schools by 2018-2019.

Board member Kelly Bentley said that closing some high schools is one way that the district can show taxpayers that it is managing its finances responsibly — and win more support for a referendum.

“I think the district has been and continues to be really good stewards of the money that we have,” she said. “We need to continue to do that so that the taxpayers feel comfortable that we are doing what we can with what we have, and there really is no other alternative.”

IPS leaders are also looking to prove their fiscal responsibility in other ways: Since Ferebee took the helm three years ago, the district has touted a focus on making sure funding goes directly to schools. Last year, consultants for the district found that spending on management and leadership had fallen to $684 per student in 2015-2016 from $876 in 2012-2013.

But IPS leadership has also spent big on some areas. The district has spent hundreds of thousands of dollars to pay outside consultants to help plan a new approach to school budgeting. And last fall, the district approved the first teacher raise in years, which increased the minimum salary for teachers to $40,000 — at a price tag of about $1.7 million per year, according to an IPS spokesperson.

If the district wants to raise teacher and principal salaries again, the district will need to have a referendum, Bentley said.

“With concentrated poverty like we have in IPS, I just think it’s a huge challenge for principals and teachers,” she said. “We just need to be able to pay them competitively. I just hope that the public will see that.”