Charter Schools & "Choice": A Closer Look

Valerie Strauss
"There is an emerging financial phenomenon in the education and social service world that could change the way social services are delivered in the United States — and who gets them. The term that describes a number of different programs in this arena are social impact bonds, and if you have managed not hear about them in recent years as they have been developed, now’s a good time to learn. What are these bonds?

They basically are a way of financing social services by bringing together social service providers with private funders and nonprofit organizations that want to expand social services committed to expanding social services to Americans.

Those who support these bond programs see them as a great way to get private entities to invest in schools and districts that are strapped for resources. Critics say they essentially are a way for the private sector to make money off investments in public education and are more likely to enrich the private entities than help children. They also see this financing technique as the next step in the privatization of education and social services, which they find troubling.

The following piece, written by scholars Martin Carnoy and Roxana Marachi, explain this new world in depth.

Carnoy is a professor of education and economics at Stanford University, where he chairs the International and Comparative Education program in the School of Education. His research explores educational policy and practice in the United States as part of the Consortium for Policy Research in Education.

Roxana Marachi is an associate professor of education at San Jose State University, where she teaches courses in the Department of Teacher Education and the Doctoral Program in Educational Leadership. Her current research interests are focused on strengthening systemic strategies for the prevention of data harms and bridging research-to-practice gaps in the integration of emerging technologies in education. 

By Martin Carnoy and Roxana Marachi

Does Goldman Sachs’ investing in desperately needed preschools in your state sound too good to be true?

No surprise, there’s more to this funding than meets the eye. And at worst, it may mean that much of today’s philanthropic giving for public services may end up as profit-making investments and the privatization of the public sector.

In the past decade, new funding structures have emerged within the social services and education arenas, with accompanying legislation poised to transform how services are delivered and who delivers them. The umbrella term for these new financial arrangements is the Social Impact Bond (SIB), although Pay For Success (PFS) and Results-Based Financing (RBF) are also often used interchangeably to refer to the same basic structures.

SIBs have been widely promoted as innovative funding approaches that allow private investors to fund public projects in health care, homelessness, early education, workforce development, and prison reform. These investors can then be repaid with interest, providing a profit to funders if the project meets predetermined success criteria with accompanying cost savings to the public. A key feature of SIB projects involves third-party evaluators whose job it is to measure whether certain “success” metrics are met by the end of the project period.

On the surface, social impact bonds may appear great for all involved.  Local governments using the approach may be viewed by the public as more prudent in their use of tax revenue, since they can scale up programs to address recidivism reduction, homelessness, education, and other public services without immediate risk to taxpayer money. Elected officials tout such investments as innovations in public service delivery.

Private financial institutions, such as Goldman Sachs, get to make profits off their upfront investments provided that final success metrics are achieved. These same financial institutions also get favorable public relations for helping fund projects intended to support underserved communities.

And SIBs appeal to the nonprofit sector, since they allow higher levels of funding for their social projects than would otherwise be available in current resource-stressed environments.

As attractive and straightforward as the basic rationale for bringing private funding into social programs may seem, there are many troubling aspects of these financing structures.

• They shift public monies to private investor profits for what are actually low-risk, tried-and-true, cost-saving interventions that the public sector could just as well have financed and directly managed itself. To date, almost no SIB projects have failed to meet performance metrics, largely because their interventions have worked before on similar populations. In addition, the U.S. Department of Education has funded ($3 million in 2016) what are essentially eight pre-studies, or feasibility studies, to establish whether preschool education PFS projects could be made attractive for private investors — in the IES’s words, “to test the viability of using Pay for Success as a way to pay for preschool services.”
  
  
• Social Impact Bonds and Pay For Success structures are expensive to set up and administer, even apart from the premium that they pay private investors. While taxpayer dollars do not immediately fund these projects, taxpayers must ultimately foot the bill in order to pay back the original investments along with the added profits, evaluation costs, and administrative expenses. As an example, according to estimates from the OECD, contracts for a Massachusetts Juvenile Justice related SIB involved over 1,100 hours of consultant time and required coordination among multiple investors and delivery partners.
  
  
• Private investors are interested in short-term returns, so the kinds of projects that attract SIB funding will necessarily avoid and undermine attention to more complex, deeper structural inequities that fuel continuing disparities at the root of social problems. Reducing youth recidivism by a certain percentage, for instance, may save local government money but has only a marginal effect on the underlying causes of youth crime.
  
  
• A final concern related to these privatized projects is that they involve extensive data gathering from youth/participants in evaluation studies designed to demonstrate so called impacts of the interventions. Shifts in governance of these projects and evaluations to the private sector eliminate opportunities for public oversight and remove participant protections that would have otherwise been required by publicly governed processes. Just two examples: in the Chicago Parent Child Study, student mobility and retention, social-emotional learning, parent engagement, and school attendance were all tracked even though they were not involved in the investors’ payout metrics. And in the Utah Preschool Project, twelve years of longitudinal data are being gathered. What are the plans for how these data are to be used, by whom, and to what end?
  
  

One indication of how quickly we can expect SIBs to expand in the United States is the passage of the 2018 Federal Social Impact Partnerships to Pay for Results Act (SIPPRA), within the Social Security Act. That set aside $100 million in funding over 10 years to support outcome payments for Pay for Success projects, feasibility studies, and project evaluations.

SIPPRA stipulates that the Treasury Department will accept applications for a variety of different kinds of projects, from increasing reducing recidivism rates, improving rates of high school graduation, and reducing teen pregnancies, to reducing homelessness and reducing the incidence of preventable diseases — in sum, many of America’s most serious social and economic challenges. In addition to SIPPRA funding, Pay for Success initiatives are also embedded directly into federal education legislation through the 2015 Every Student Succeeds Act.

In our full policy brief published by the National Education Policy Center at the University of Colorado at Boulder, we conclude that policymakers and others should be skeptical of the hype that SIBs are a win-win for all concerned and without downsides. Such claims are often made by private investors and by non-governmental organizations seeking more funding to engage in social interventions. We urge caution in bringing the private sector further into the areas of social services and education and reveal several layers of potential exploitation that appear to be tethered to such financial structures.

We agree with David Macdonald, senior economist with the Canadian Center for Policy Alternatives, who refers to SIBs as “anti-philanthropy."

He suggests that at the core, they are profit-driven, government-funded business deals that eventually will lead to the Wall Streetification of public services. Public agencies are encouraged to take a “thanks, but no thanks” approach to middleman markups that would allow intermediaries and investors to profit off projects funded by the public. No matter how well-intentioned private investors may appear to be, they are ultimately governed by private interests, which can diverge from the public interest behind these policies."