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Budget & Finance Opinion

Proposals for a Cost-Conscious Era: Turnaround Bonds

By Rick Hess — October 14, 2010 3 min read
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Given today’s shrinking budgets and the tough half-decade that looms for K-12 funding, we can no longer afford to remain wedded to “this...and that” reform or to be blasé about whether we’re getting sufficient bang for our buck. However, the necessary shift in mindset will not happen on its own. After all, K-12 schooling has long been a place where superintendents and principals earn much grief for making cuts but little recognition for smart savings or boosting cost-effectiveness. What’s needed most are politically viable proposals that make it easier for local, state, and national leaders to get serious about K-12 productivity.

This week, I’m touching upon four such ideas that I’ve written about recently for National Review and (along with my colleague Olivia Meeks) for the Wisconsin Policy Research Institute. Today, I want to talk about using “turnaround bonds” to facilitate a more performance-oriented and politically feasible approach to vetting and employing promising new school providers. (Check out the WPRI piece for more detail but, for a truly comprehensive vision of the concept, check out the Bryan Hassel and Daniela Doyle AEI Working Paper “Shifting Risk to Create Opportunity: A Role for Performance Guarantees in Education”).

School officials remain skeptical of turning over low-performing schools to outside providers even when the district is flailing and those providers have the ability to drive cost-effective improvement. Given the uncertain results and political land mines involved in contracting with outside providers, officials typically play it safe. This means that school operators who can make a plausible case that they can effectively improve a low-performing school while trimming costs by five or ten percent find little opportunity to prove their mettle. The upside of a superintendent utilizing such a provider is pretty muted, while the downside risk—if the provider fails, or if the cost-cutting becomes a public issue—is substantial.

To help mitigate these concerns, operators seeking to turn around low-performing schools would post a bond against specified performance goals. Whereas the only consequence for a failed charter school today is possible school closure, turnaround bonds would force providers—just like firms bidding to build capital projects like highways or bridges—to put up a cash guarantee of satisfactory performance.

If adopted, turnaround bonds would require states to establish a legal framework for these bonding arrangements; create a facility for approving bonded providers and holding funds in reserve; set performance guidelines and clear rules for gauging performance; and determine parameters regarding bond size. In accord with state guidelines, districts would then negotiate standards relating to student achievement, completion, and the like with the provider in question.

Bond amounts representing perhaps ten percent of operational expenditures would seem a reasonable starting point—this would equal around $2 million for a three-year bond at a school enrolling 500 students. The sum is large enough to constitute substantial compensation to the district and affected students if the operators don’t deliver, but not so large as to be prohibitive.

Turnaround bonds could help alleviate concerns about spending public monies on nontraditional providers, incentivize performance, and create a performance-based disincentive for the charlatans seeking to make a quick buck. They would permit district and state officials to reassure parents and voters that cost-effective bidders would be held accountable for delivering promised results, and that those which failed to deliver would help pay for the appropriate remedies—something that neither troubled districts nor charter schools are expected to do today.

Perhaps the most appealing aspect is that turnaround bonds offer an alternative to one-size-fits-all, state-defined performance metrics. Those bonders, non-profit or for-profit, who choose to backstop school providers will be able to do so in accord with their own criteria. This means that the question will be whether a provider can make a compelling enough case that some kind of bonder will be willing to put up cold, hard cash to guarantee the provider’s efforts. Now, this guarantees nothing other than a provider will then be eligible to bid for turnarounds. It will still be the district’s prerogative to select providers and to structure contracts around specific outcome measures; but states are no longer required to define across-the-board, and typically laxly enforced, performance standards.

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The opinions expressed in Rick Hess Straight Up are strictly those of the author(s) and do not reflect the opinions or endorsement of Editorial Projects in Education, or any of its publications.