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Pay for Success Learning Hub
Government is the service provider of last resort. For good or bad, oftentimes it is only after everything else has gone wrong that government steps in and tries to solve a problem. The problem historically has been one of timing -- government needs to both maintain adequate funding for programs addressing a problem now while investing in earlier stage interventions that can lead to real savings in the long-term.
In the preschool context, the taxpayer has historically footed the bill for special education and other later stage interventions that seek to close the education gap between kids performing at or above grade level and those kids who are falling behind. Unfortunately, later stage interventions have been shown to be more costly and less effective, in general, than earlier stage interventions. A targeted educational intervention earlier in the life of an at-risk child has been shown to lead to lower rates of special education, dropout, delinquency, and even criminal behavior.
What was the problem?
What is the solution?
The pay for success model solves that timing problem by giving government the tools to fund the ounce of prevention on the front end out of cost savings on the back end, effectively shifting the traditional focus of government from paying for failure to paying for success. The model leverages private resources to fund the early-stage intervention now, which get repaid over time out of demonstrated cost-savings in the future.
A version of pay for success was developed in the UK in 2010 in the context of recidivism reduction. Salt Lake County completed the second pay for success transaction in the US with its preschool initiative in 2013. The transaction pioneered the use of the model for education.
Prior pay for success transactions used a benchmark percentage reduction in aggregate
levels of recidivism as the repayment trigger. If the threshold is achieved, private investors get repaid in full. If not, they lose everything. That jagged risk profile has a somewhat limited appeal to investors and could require a larger repayment premium to properly incentivize them to invest. By contrast, in our preschool pay for success initiative, the repayment trigger is based on each individual child’s performance. Private investors are repaid a portion of their investment when any one child avoids the need for special education. The result is a much smoother risk / yield curve that is much more attractive to private capital.
The model is an exciting one for multiple reasons. For one, pay for success gets policymakers out of their traditional role of picking winners and losers in interventions. Elected officials are rarely subject matter experts in the areas where they set policy, but are often in the position of picking one type of intervention or service provider over another. Pay for success puts policymakers in the more sensible role of picking outcomes (e.g., 10% reduction in chronic homelessness) and government in the position of only having to pay for programs that actually achieve those outcomes. Unlike some other government programs where good money follows bad in order to save face on a pet project gone wrong, if a pay for success intervention isn’t succeeding, government doesn’t pay and can simply move on.
The model also uncompromisingly relies on data-driven, evidence-based practices. Too often, interventions are selected based on instinct or the gut feeling of the policymaker. Well-intentioned though they may be, those programs may or may not have a statistically significant effect on desired outcomes. The data underlying pay for success initiatives have to stand up to the scrutiny of sophisticated private sector investors who are putting their money at real risk.
Pay for Success holds incredible promise for getting things done in a bipartisan manner. The preschool initiative passed through the Salt Lake County and later State of Utah legislative processes with strong bipartisan support. The extent of the common ground was remarkable – Republicans liked the initiative because it shifted execution risk from the taxpayer to the private sector. Democrats liked the initiative because it opened up a potent new source of capital to address previously unmet needs.