Rick Perlstein’s comprehensive look at Chicago school reform is a must read in Jacobin magazine.
This excerpt addresses Pay for Success, a topic dear to my heart and mostly unreported elsewhere.
Given the CPS’s $480 million budget hole, and the fact that its bonds are rated at junk status, something had to give. But if you’re wondering why special education bore the burden — well, you need to know about Wall Street’s latest, most whacky financial instrument: the social impact bond.
A social impact bond is a loan to a public entity that pays off for investors if certain policy benchmarks are met.
Like most instruments of privatization, it is a very sweet deal for the financial masters of the universe. The entrance costs imposed on cities are enormous: right up front, they have to hold the money in escrow for any potential repayments of the loan. In the case of Chicago’srecent $16.6 million deal to expand preschool with Goldman Sachs and the Chicago investment bank Northern Trust (which has two members of the Commercial Club’s Education Committee on its board), over 10 percent of the loan goes to various third-party costs like legal fees — including the investor’s legal fees, which the city pays.
The risk is also very low, because a third lender, the Pritzker Family Foundation, signed on to the deal in a “subordinate” role to absorb any financial hits before the banks do. For their sacrifice, the banks may earn a profit of as much 50 percent, if the benchmarks are met. And what are those benchmarks?
You’d better sit down.
Fewer students in special education.
You read that right. According to a CPS press release, “Payments for decreases in special education are $9,100 compounded at an annual rate of 1 percent for each child that avoids special education after attending the CPC program.”
The logic is absurd, and the science behind it is bogus. Utah tried a similar program. The New York Times reported last year, “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 Times approached nine separate researchers to evaluate the claim. All nine agreed Goldman Sachs’s evaluators “significantly overstate the effect that the investment had achieved in helping young children avoid special education.” They noted that the most any previous preschool program had decreased the need for special education was 50 percent, not 99 percent — and that those programs cost four times more than Goldman Sachs loaned the state.
But, you know, how else can you lower the number of children in special education? By cutting the special education budget.