The Impact of Social Impact Bonds: Predictable and Predicted

No one could have seen this coming (boldface mine):

It was, in the vernacular of corporate America, a win-win: a bond that paid for preschool for underprivileged children in Utah while also making money for investors.

Goldman Sachs announced last month that its investment in a Utah preschool program had helped 109 “at-risk” kindergartners avoid special education. The investment also resulted in a $260,000 payout for the Wall Street firm, the first of many payments that is expected from the investment.

Gov. Gary R. Herbert of Utah hailed the program as a model for a new way of financing public projects. Such so-called social impact bonds are a new kind of public-private partnership, promising financing from Wall Street and imposing a goal on local governments.

Yet since the Utah results were disclosed, questions have emerged about whether the program achieved the success that was claimed….

Goldman said its investment had helped almost 99 percent of the Utah children it was tracking avoid special education in kindergarten. The bank received a payment for each of those children.

The big problem, researchers say, is that even well-funded preschool programs — and the Utah program was not well funded — have been found to reduce the number of students needing special education by, at most, 50 percent. Most programs yield a reduction of closer to 10 or 20 percent.

The program’s unusual success — and the payments to Goldman that were in direct proportion to that success — were based on what researchers say was a faulty assumption that many of the children in the program would have needed special education without the preschool, despite there being little evidence or previous research to indicate that this was the case

The rate of success being reported by Goldman — and the success of the whole program — is a product of the program’s method of identifying a population of low-income 3- and 4-year-olds who were likely to need special education without preschool.

The school district tested each incoming preschool student using a picture and vocabulary test known as the P.P.V.T. Any child who, before entering preschool, received a score below 70, a very low score, was labeled likely to later need special education.

For Goldman, the children identified in this way were crucial to its investment, because the bank was paid for each at-risk child who ended up not needing special education after leaving the preschool program.

But early childhood experts said it made little sense to base Goldman’s payouts on the assumption that all of the children who scored low on the P.P.V.T. test would end up in special education without the preschool.

At the most basic level, the P.P.V.T. is not usually a test used to screen for special education, particularly on its own, education experts said. What is more, non-English-speaking students have been shown to score very poorly on the test when it is administered in English, which is not a sign of any learning disability, but of a need for English instruction.

“To just assume that all these children would have gone to special education is kind of ridiculous,” said Ellen S. Peisner-Feinberg, a senior scientist at the Frank Porter Graham Child Development Institute.

Mr. Innocenti, who administered the tests in Utah, said that from 30 to 50 percent of the children in the preschool program come from homes where English is not the only language. He said the school decided to test the children in English, despite the many non-English-speaking children, because the preschool program is conducted in English.

Before Goldman executives made the investment, they could see that the Utah school district’s methodology was leading large numbers of children to be identified as at-risk, thus elevating the number of children whom the school district could later say were avoiding special education. From 2006 to 2009, 30 to 40 percent of the children in the preschool program scored below 70 on the P.P.V.T., even though typically just 3 percent of 4-year-olds score this low. Almost none of the children ended up needing special education.

When Goldman negotiated its investment, it adopted the school district’s methodology as the basis for its payments. It also gave itself a generous leeway to be paid pack. As long as 50 percent of the children in the program avoid special education, Goldman will earn back its money and 5 percent interest — more than Utah would have paid if it had borrowed the money through the bond market. If the current rate of success continues, it will easily make more than that.

No one could have foreseen this (boldface added):

This foray into special education will merely be the beginning: the obvious expansion is to move from special education reduction to general performance–that is, how well ‘normal’ students do (that’s where most of the students–and the business–are). Like the special education contract, there have to be milestones–quantifiable ‘deliverables’: the obvious ones being student test performance. Contractors will have to ‘make the numbers.’ There is no way such a system could work without testing–it would have to be an integral component (I suppose a system could be built around at high school graduation rates, but that could easily be gamed too). The current emphasis on high-stakes testing is the way to justify this sort of educational assessment: once it becomes ‘normal’ to hire and fire teachers based on scores, the next ‘logical’ step is to privatize and monetize this system. In an educational world where scores (usually in two subjects, reading and math) are the proverbial bottom line, making the numbers is all that matters.

But I’m sure this financial pressure will not exert any pressure whatsoever to game the system, overemphasize testing, or neglect parts of the curriculum–or education in general–that aren’t measured or quantifiable.

Impossible to predict (boldface added):

Given their history of financial chicanery aimed at municipal governments (Goldman Sachs played too), it’s also hard to believe that they won’t game the metrics. Probably not in this specific case: too much attention will be paid. But down the road, expect municipal and state governments to be fleeced, all because the idea that we are members of a commonwealth, that if you are strong, you are supposed to aid others because it is the right thing to do, has withered.

This will end badly.

To review, we have Goldman-Sachs not only is profiting by cheating, the program actually will cost more than if the Utah state government had paid for the program itself.

Despicable–and predicted. The reason this was predictable is simple: Goldman-Sachs has lied and cheated so many times, it would be out of character from them to do otherwise.

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One Response to The Impact of Social Impact Bonds: Predictable and Predicted

  1. jrkrideau says:

    He said the school decided to test the children in English, despite the many non-English-speaking children, because the preschool program is conducted in English..

    This seems to show that Brenda Van Gorder, director of preschool services at the local school district, and Mr Innocenti are totally incompetent or corrupt. Any one with an even nodding acquaintance with psychological testing would have known how stupid this was. Heck, they should have tried Russian instead of English.

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