In 2006, in a presentation to ReadyNation marked “Strictly Private and Confidential,” Paul Sheldon of Citigroup proposed a new way to finance preschool: early childhood student loans.
Non-profit organizations could borrow from banks or student loan companies, said Sheldon, and then offer loans to government organizations or individuals. Then, the loans could be pooled and turned into asset-backed securities, and – voila! – an early childhood education market would be created, worth as much as 10 billion dollars.
The idea of preschoolers saddled with debt, however, was clearly going to be too controversial.
Over time, Citigroup’s model was reworked into the more palatable “social impact bond,” which are now proliferating across the country.
These bonds, which are really private loans made to government or non-profit agencies with repayment contingent upon pre-determined “outcomes,” are sold under the premise that they can help tax-payers save money in the long-run by preventing the need for remedial services.
According to ReadyNation founder, Robert Dugger, however, evidence that such programs actually result in cost savings need not meet the burden of scientific proof. As long as the evidence is “strong enough to provide funders with reasonable assurance that they will get their money back,” the program can be considered a go.
One of the first social impact bonds in the U.S. was financed in 2012 by J.B. Pritzker and Goldman Sachs for a pre-K program in Utah, with investors claiming it would prevent children from requiring costly special education services down the road.
“We were able to make the sell to the Salt Lake County based on a benefit-cost analysis that we did with their staff,” explained Janis Dubno, an investment banker at Sorenson Impact, in a conference call with the “Human Capital and Economic Opportunity Working Group.”
But thus far, there has been no indication that the program has resulted in an cost savings for Salt Lake, or that the program has been beneficial for children involved.
Goldman and Pritzker, however, have gotten the full pay-out from their investments.
With the prospect of near-guaranteed return on investment and a derivatives market waiting in the wings, it should come as no shock that the same bankers that played fast and loose with subprime mortgages (Pritzker and Goldman included) are now eyeing not only early childhood education, but also K-12 programs as a chance to further line their wallets with these bonds.
And with little public scrutiny, the effort to get them off the ground has been quiet but massive, with the country’s largest and most well-endowed foundations working alongside investors to seed the market nationwide, and education policy shifting to serve up the data necessary for such investments.
In addition to wreaking havoc on teaching profession, violating children’s privacy, and drying up local school budgets, one has to wonder if the move toward social impact bonds may be setting us up for another market crash.
“Big asset bubbles,” explains Gerald Epstein of the University of Massachusetts Amherst, “such as we saw in the housing market in 2004-2007…can be very dangerous because they are usually fed by massive increases in debt… which leads to dangerous interconnections and the building of a financial house of cards.”
If Epstein is right, how long until the cards topple?
And at what cost?