When successful, there is probably no social investment with a higher potential economic return to society than early childhood programming.

The University of Chicago and Nobel Prize winning Professor James Heckman have espoused the economic benefits of early childhood programming for decades. Fortunately, the private sector is finally beginning to take notice, and is mounting a national effort to see that early childhood programs get properly funded. A leading-edge voice emerging in this arena is ReadyNation, a national nonprofit organization dedicated to involving the business sector in promoting the significant benefits of early childhood programming. The ReadyNation website provides an unusually extensive and current compilation of links to key research reports and promising innovations in the early childhood field.

The work of the Center on the Developing Child at Harvard University is also active in attempting to draw attention to the field. The center provides seminal leadership in focusing on the importance of early childhood interventions in improving brain development during the first few years of life. The National Scientific Council on the Developing Child further highlights this emerging science with a dynamic video on the development of brain circuitry between infants and significant adults in their lives.

Increasing knowledge about the effects of toxic stress on young children is focusing attention on the link between poverty and interference with brain development. A recent study published in Jama Pediatrics found that children living in poverty without adequate nurturing had smaller brain capacity for learning and memory, and exhibited lessened capacity for the development of good emotional health.

But how do we finance these interventions? This is the new challenge for those who design social innovation financing. How do we show explicit correlations between early childhood interventions and future financial benefits that are sufficient to incent investors to risk upfront capital to pay for the interventions?

A few “first movers” in impact investing are now stepping up to the plate to tackle the challenge. Goldman Sachs and the Pritzker Family Foundation recently announced the first early childhood social impact bond. Working with the United Way of Salt Lake City, Utah, the program will direct a $7 million investment to the Utah High Quality Preschool Program for the purpose of avoiding the special education costs associated with elementary school students indentified as high risk. The program will be financed with two classes of debt — $.46 million of senior debt from Goldman Sachs and $2.4 million of junior debt from the Pritzker Foundation.

More recently, the state of South Carolina has issued an RFI seeking information related to the design of a social impact bond program in connection with the early childhood interventions provided by the Nurse Family Partnership. A copy of the RFI can be found here.

“The evidence is undeniable. Quality early childhood programs…will help close the achievement gap, reduce social costs and increase adult productivity.Investing in these programs, especially for disadvantaged children, is fiscally responsible because they pay for themselves.

ReadyNation
Policy Statement 2013

 

Pay for Success Financing for Early Childhood Programs: A Path Forward

The Institute for Child Success, in cooperation with the Connecticut Center for Social Innovation, has issued a new white paper on the application of Pay for Success financing to the field of early childhood.

The brief, Pay for Success Financing for Early Childhood Programs: A Path Forward, provides a uniquely comprehensive and candid analysis of the challenges awaiting those who attempt to apply PFS in the early childhood arena, and offers strategies to address them.

The paper concludes that preparing for a PFS transaction requires greater focus on outcomes and evaluation, which is of value to all providers whether they engage in a PFS transaction or not.

Chief among the challenges in applying PFS to early childhood is the difficulty identifying short-term, measurable results that can be translated into financial savings and/or revenues within a reasonable time frame. Early childhood interventions which take many years to pay dividends are difficult to fit into a payment model that expects measurable financial results in just a few years, and not over a child’s lifetime

A second challenge in the Early Childhood/PFS marriage is the allocation of possible government savings and/or earned revenues over multiple government agencies. In other words, if an intervention succeeds, which state or local agency saves money, or gains revenue – and therefore will agree to pay for the results?

There are dozens of agencies which save money if children grow up into productive, taxpaying citizens — corrections, education,  mental health, social services – but the assignment of these benefits is difficult, and the time frames required to measure results are more than most investors or government budgets will bear.

As we stand at the beginning stages of Pay-for-Success financing, this paper offers guidance and strategies to ensure that this new model of investing in proven interventions can be adapted and put to use for quality early childhood programs.