Quality early childhood programs have proven to be valuable for helping young children become school-ready and more successful in school and life. The evidence is especially clear that both quality pre/post-natal home visiting and pre-K schooling make substantial differences in opportunity, a child’s ability to adapt socio-emotionally, perform at grade level, graduate from high school, and maintain employment.
Better performance in school, less need for special education, less grade retention, and higher graduation rates are only a few of the advantages of quality early childhood programs. But who benefits? Obviously, the child is the primary beneficiary. There is also a positive two-generation impact on maternal education, labor force participation, and parental income. Finally, taxpayers are the ultimate winners when children become productive citizens who can stay employed, pay their taxes and contribute to creating better communities.
Many people who are familiar with the primary and secondary educational system in the US believe we don’t invest enough in educating our children. The debate around this issue becomes more complicated when it comes to the ages zero through five. Since the care and education of young children is still largely a private market concern, there is even less clarity regarding how early childhood programs should be funded.
What we do know is that the number of children who benefit from quality early childhood programs is a small fraction of the number that could benefit if the resources were available.
Tax increment financing, tobacco company settlement revenues, dedicated tax levies, property millage, and various borrowing tactics have all been used with some degree of success by governments in addressing social issues. Additionally, the private sector plays an important role through foundation grants and program related investments, and social impact portfolio investments by banks and other investors.
Pay for Success (PFS) is a relatively nascent arrangement being successfully used for funding social issue interventions in several areas, among them homelessness recovery, health care, reducing recidivism, foster care and early childhood. Like other arrangements, it is not a panacea and is best employed when the social issue factors deem it a good fit.
PFS works through a collaborative relationship between multiple parties to scale a high quality program, or programs, to reach more children. Program outcomes are set and formalized in governing documents. Then, each transaction participant serves a role:
- Service providers accommodate more children in programs
- Target population is identified to receive services
- Investors fund the program expansion
- Evaluators confirm that promised outcomes are achieved
- Outcomes buyers (usually government) reimburse investors for successful outcomes
- Intermediaries oversee the financial operation and programmatic monitoring of the project
Importantly, investors are not fully reimbursed if outcomes are not forthcoming. This puts outcomes buyers at little or no financial risk in a PFS project where “success” is not achieved.
The following graphic illustrates how PFS works:
So, what are the factors where PFS can be successfully deployed to fund early childhood programs? Assuming the needs analysis has been performed to confirm that more children should be served and the community supports it,
- The program should be “high-quality”. That means that there should be an agreement among experts that the program contains the essential elements that will help an individual child achieve what the program purports to achieve. For instance, Pennsylvania’s STARS pre-K system considers STARS 3 and 4 centers to be high quality.
- The program should have some evidence base, or be developing such an evidence base, that supports the assertion that children are experiencing successful outcomes. One example is being ready for kindergarten with respect to behavioral and cognitive function.
- A diverse, committed stakeholder group can be formed to direct construction and steer operation of the PFS project. The public-private partnership developed between government and private sector leaders, early childhood experts and respected community actors must be a collaborative entity, not just in name. The partnership will work with selected service providers to specify and codify outcomes for which there will be “success payments”. Those outcomes should be both monetizable in the short and medium term and improvement-oriented in the medium and long term. Monetized outcomes can be related to real cash savings such as reductions in grade retention. Improvement outcomes will usually produce longer term cash savings, but the goal is to create tipping points in a child’s life where they will embrace education, excel to the best of their ability, and progress in becoming more independent and fulfilled. Such improvement outcomes might include less truancy, higher rates of graduation, and less involvement with the justice system.
- If carefully constructed, PFS can even benefit children with disabilities. Identifying these children early with the opportunity to include them to the extent possible in early intervention and mainstream activities, there is evidence to suggest that disabled children can learn greater independence and lead healthier lives as a result. Further, PFS is not about trying to reduce services to disabled children. On the contrary, PFS works only when there is no perverse incentive to deprive children with assessed disabilities of the assistance they need.
- Potential customers of early childhood program outcomes need to be available and willing to pay a fair price for those outcomes. That price might be beyond the scope of this blog, but the customer collaboratively determines the success payment with other stakeholders. PFS lexicon usually refers to the customer as the payer, but customer is a better term since it receives something of true value from the PFS project. For instance, a city might be a customer paying for high literacy scores connected to a high quality pre-K program. However, the longer-term value is much greater: healthier, more vibrant communities. Economist Tim Bartik has found high quality early childhood programs in order to positively impact community economic development value.
- Interested investors must see the importance of investing in the potential value of a PFS project. Motivations vary to some degree, but PFS investors in early childhood believe in the quantitative and qualitative benefits of these programs. Making an attractive return on a successful PFS project is certainly important. Just as important is the alignment between the investor’s investment strategy and how that supports the success of more children. What returns on investment (ROI) are we talking about to investors? Generally single digits. However, Nobel Laureate James Heckman has recently calculated a 13.7% ROI on a combination of two North Carolina programs for opportunity kids starting at eight weeks old and extending through age five. Everyone will share in that return, with investors generally taking a partial share. In fact, society is the primary beneficiary of producing successful kids using PFS. A government customer may reimburse investors for great results, but that customer will often also enjoy part of the ROI. A good government will reinvest those returns in sustaining and expanding the early childhood programs that yielded them in the first place.
One thing PFS is not: an arrangement that strives to privatize the work of addressing social issues that are the domain of the public sector. Instead, PFS serves as a framework for establishing discipline in solving social problems where stakeholder interests and accountabilities, problem-solving, and rigorous evaluation are aligned with the sound delivery of quality programs for the benefit of kids and their families, and their communities. The goal is that a successful PFS project will be adopted by the government as “proof of concept” for demonstrating that communities can continue to address difficult social issues on behalf of taxpayers.
You certainly don’t need to employ PFS to assess the success and advance the expansion of quality early childhood programs. But, the structure of a PFS model lends itself to supporting quality, innovative programs for children and their families where the needs of all stakeholders are aligned and all actors are accountable to taxpayers.
Philip A. Peterson is a Senior Advisor for Econsult Solutions. He specializes in early childhood and homelessness Pay for Success (PFS) strategies using social impact financing. He assists states and local jurisdictions with advisory services in developing PFS projects in the areas of early childhood education, parental/family education for young children, pre/post-natal home visiting and housing and treatment programs for homeless individuals and families.