Monday, June 17, 2013

The Cost Savings of Pre-K: Who Should Reap the Reward?

Does pre-k save schools money in the long run?  The research says the easy answer is yes.  Now private fund managers are getting in on the "action."  Last week, the New York Times posted an interesting article about Goldman Sachs lending 4.6 million dollars to Salt Lake City's school district for it to fund new pre-k services.  The article is short on details, but it suggests the investment is a gamble by Goldman Sachs.  Goldman Sachs will lose money if the program is unsuccessful and make money if it is successful.  Success is defined by whether the school will save money by offering pre-k, due to lowered special education and other service costs as students progress through later grades.  The NY Times article does not specifically indicate what losing money means for Goldman Sachs' investment: the loan doesn't have to be paid back, the loan doesn't have to be paid back with interest, or something else.  By making money, it means Goldman will get 5% interest plus some other success fees. 

Yesterday, even more facts came out.  An AP story reports that Goldman Sachs stands to get 5% interest plus 40% of any savings the district reaps.  Currently, Salt Lake City spends an additional $2600 per pupil per year on students enrolled in special education.  Based on the most recent data  I could find, Salt Lake City enrolls 2991 students in special education.  Of course, a substantial portion of these students are likely in special education for a very good reason and better pre-k services would not have affected their eligibility.  But for the sake of argument, let's assume that with better early education opportunities, 30% would have avoided special education (at least during the first 6 years of schools, which is the relevant period for Goldman Sachs).  This means the potential pot of savings is roughly $2.33 million, 40% of which is $933,000 (Goldman's cut).  Not bad for an initial loan of $4.6 million, although it is not clear whether this is the per year loan amount, a one year loan, or something else.  The deal could be even sweeter for Goldman Sachs if the loan is to cover multiple years of pre-K, thus giving them a cut of the savings on more cohorts of students.  If this were the case, their payout would multiply.

I find it hard to criticize the expansion of pre-k, regardless of the circumstances.  The benefits are priceless for the students and families receiving it; who cares if Wall Street is picking up the tab.  But I am still ambivalent/concerned.  First, pre-k is not a gamble.  We know it works, so why don't we--the government--fund it on our own dime and reap all the savings?  If this is a state or district that can't or won't fund pre-k on its own and Wall Streets puts them on the right track with seed money, I suppose it is a win-win situation.  But I am skeptical that Salt Lake can't do this on its own.  Second, while Wall Street is not in the business of losing money, it is in the business of taking risks.  Is it possible that the availability of Wall Street money might incentivize risky educational programs outside of pre-k?  Wall Street can afford losses in one district so long as other districts pay out.  Can the districts and communities who lose afford  these losses?  Maybe so, if the payback terms are favorable; maybe not, if the districts go just further into debt and receive no benefit for doing so.  On the other hand, if districts are savvy and stick to pre-K, I suppose there is very little risk for them or wall street.

 

    --db

http://lawprofessors.typepad.com/education_law/2013/06/is-pre-k-a-good-business-investment.html

Equity in education, News, Pre-K Education, Special Education | Permalink

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