Pay for Success Watch: Chicago Announces Plans for Major Social Impact Bond Project

Last week, Mayor Rahm Emanuel announced that the city of Chicago will be home to a substantial social impact bond project addressing early education services for impoverished youth and families.

According the Nonprofit Finance Fund, there are currently projects in various implementation stages underway in Massachusetts, New York, Utah, Colorado, Ohio, Connecticut, Michigan, Illinois, South Carolina and California.

Social impact bonds (also known as pay for success projects) shift the burden of social investment off the government and on to private investors. Private sector investors front the capital for organizations to implement social programs. The government only pays the initial investor back, with interest, if a specific set of outcomes are met. So, in essence, the government is now paying for outcomes and not services rendered.

The mayor and representatives from Chicago Public Schools (CPS) announced a new $16.9 million private investment in early education. The city’s youngest citizens will have access to expanded pre-K services using a half-day Child-Parent Center Model (CPC). The CPC works with children and families to improve educational outcomes. Children receive educational services, while their caretakers receive support services.

The Social Impact Bond money will serve approximately 2,620 children in the city over the course of four years. This is about half of the children under the poverty line, without access to pre-K education, according to the city. The remaining half will be served through an additional $9.4 million in funding from the city and Chicago Public Schools, as well as a $4.5 million state grant.

The primary lenders for this project include Goldman Sachs Social Impact Fund and Northern Trust financial services firm. The J.B. and M.K. Pritzker Family Foundation is listed as a subordinate lender. The Finnegan Family Foundation will underwrite a portion of the evaluation costs.

IFF (formerly the Illinois Facilities Fund) will be the project coordinator. IFF will manage the flow of funds between funding partners and CPS, distributing loan dollars for Child Parent Center operations and repaying lenders with the success payments from CPS and the city.

Metropolitan Family Services (MFS) will serve as the program intermediary to the project, helping CPS identify best practices from around the field that could be used to further the success of the model. MFS is a subcontractor of project coordinator, IFF.

This deal is the second and largest Social Impact Bond in the US, addressing early childhood education. The first was launched in July 2013 in Utah – also with Goldman Sachs, the J.B. and M.K. Pritzker Family Foundation and the United Way of Salt Lake County.

The grant will follow participants for 14 years to determine if outcome measurements have been met. Metrics include increasing kindergarten readiness, improving third grade literacy and reducing the need for special education services. An independent evaluator will assess whether these measurements have been met. If analysis proves students have fared well after attending the early education programs, investors will get a return on their investment.

The city estimates that surplus will come from CPS savings of $9,100 per student for each student who avoids special education services. An additional $2,900 would be saved for each student deemed ready for kindergarten after attending the program, and a $750 savings for each student who scores above the national average on a third-grade reading test.

“There is nothing that’s more important than our kids. Giving them a quality education from day one and helping provide their parents with the told to be consistent and active partners in their children’s education is the best investment any of us can make,” said Mayor Emanuel, in a statement.

Judith Fenlon is the money and business editor of The Imprint.

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