Early Childhood

Goldman Sachs Among Backers to Finance Chicago Public Preschool Expansion

By Lillian Mongeau — October 09, 2014 2 min read
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Chicago Mayor Rahm Emanuel announced this week that he plans to borrow $17 million in “social impact bonds” to expand his city’s public preschool program.

Emanuel’s plan, if approved by the City Council and agreed to by the Chicago Board of Education, will be the largest private investment in public preschool through social impact bonds yet.

“If you don’t make this investment, you’ll be borrowing other money to pay other expenses, both for failure on the educational side,” the mayor told the Chicago Tribune, and for expenses related to high school dropouts.

Research by economists, most notably James Heckman of the University of Chicago, asserts that money spent on sending low-income children to preschool leads to savings down the road amounting to many times the initial outlay. Analysts have calculated a $7 return on each $1 of investment by tracking government savings due to the better academic performance in school and better life performance after school—primarily staying out of jail and off welfare—of preschool graduates. (Calculations of the exact return vary, depending on the study. The estimate of $7, calculated in analyses of the Chicago-based Child-Parent Center model of early childhood education, is somewhere in the middle.)

Officials at Goldman Sachs and Northern Trust, both large investment banks and the primary lenders in Chicago, are betting that prediction is accurate. They will only get their money back if it is.

The way a social impact bond works, a school district, or other public entity, borrows money to run a social program. It is expected to pay the loan back with interest, using the savings it reaps farther down the line as the result of the initial investment. In the preschool model, which was pioneered on a smaller scale in Utah’s Granite School District last year, the hoped-for savings are meant to come from keeping students out of special education, avoiding remediation in early elementary school, and hitting 3rd grade reading targets. The Granite School District encompases several towns in Salt Lake County, including portions of Salt Lake City.

Details of exactly how all the money will change hands in Chicago are complicated. Chicago Tribune reporters Hal Dardick and Juan Perez Jr., do a stellar job explaining it all in their recent run-down of the new preschool bond program.

You can also read more about the Granite District program or use Education Week‘s interactive calculator to figure out just how many children need to stay out of special education for Goldman Sachs’ investment there to pay off.

(Photo: Chicago Mayor Rahm Emanuel is interviewed at City Hall in Chicago in 2012. --M. Spencer Green/AP-File)

[CORRECTION: The original version of this post included an incorrect attribution for the $7 return on investment figure. That figure is from the University of Minnesota studies, led by Arthur J. Reynolds, which analyze the cost-benefit ratio of the Chicago Child-Parent Center’s early childhood education program.]

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A version of this news article first appeared in the Early Years blog.