Mayor Rahm Emanuel’s plan to use $17 million from private investors to provide half-day early childhood education for 2,618 students sailed through the City Council Wednesday, despite concern about the “very high rate of return” for investors.
The Chicago Teachers Union and Service Employees International Union (SEIU) Healthcare Illinois and its City Council allies have likened the arrangement to the much-vilified parking meter deal.
That’s because the so-called “social impact bonds” will actually come in the form of a $17 million loan from the Goldman Sachs Social Impact Fund and Northern Trust as senior lenders. Subordinate lenders are the J.B. and M.K. Pritzker Family Foundation.
The annual interest rate of 6.3 percent will allow lenders to more than double their $17 million investment over an 18-year period.
But, they will be repaid only if students realize “positive academic results.”
When the roll was called, the final vote was 41-5. Voting ‘No’ were: Bob Fioretti (2nd); Toni Foulkes (15th); Ricardo Munoz (22nd); Scott Waguespack (32nd) and John Arena (45th).
Prior to the final vote retiring Ald. Latasha Thomas (17th), chairman of the City Council’s Education Committee, urged her colleagues to adopt the innovative plan, saying it thinks “outside the box.”
“It costs less now than it will later. Do we pay to better prepare our children now or do we pay on social costs later?” Thomas said.
Noting that kids who get a quality education before age 5 are more likely to graduate high school and less likely to need special education or get in trouble with the law, she said, “This is an investment in the city’ future–our future.”
Northwest Side Ald. John Arena (45th) agreed that early childhood education is critical. But, that does not mean this particular deal is a good one.
“If I was at Goldman Sachs, I would be doing this, too,” Arena said, pointing to the high rate of return.
“Financing it to the benefit of the financial community and using our children as collateral is not the way to do it.”
Mayoral challenger Fioretti denounced the deal as “bad public policy that will haunt us forever.” That’s because it “allows the banking industry to place a sure bet on our kids’ futures for their own profit,” he said.
Ald. Michele Smith (43rd) said she’s having trouble understanding the argument against the mayor’s “modest experiment” to bankroll early childhood education.
She portrayed it as a choice between finding an innovative way to do something about a problem that threatens the city’s future and doing nothing because of a shortage of revenue, she said.
“If it works, we all gain. If it doesn’t, we don’t lose,” Smith said.
After the vote, Emanuel rose from the rostrum to offer a spirited defense of a financing scheme that will allow the city to target its neediest kids.
“I firmly believe kids start dropping out of college in third grade. And if you don’t catch ’em early enough, it’s not like fourth-grade gets easier,” the mayor said.
“We can all find a reason not to like this or that. I’ve got it…. [But] we are now gonna have universal pre-K for all 4-year-olds from low-income families — the kids that need it the most and their parents will also receive educational support so what happens in the classroom is not lost at home. It’s reinforced.”
He added: “I’m proud we’re doing something. Just not criticizing, but taking action. I do not believe in wasting another generation…. We’re taking a step — not debating it, deferring it, denying it…. If it doesn’t work, [the lenders] end up holding the bag.”
Chief Financial Officer Lois Scott had said earlier this week that investor returns will be based on three benchmarks. If children in the program have higher scores on kindergarten readiness than comparable kids who did not go, investors get a one-time payment of $2,900-per-child.
If participants have higher scores on third-grade reading tests than comparable kids, the one-time payment is $750-a-child. And if participating kids have less need for special education services, the savings will be shared between CPS and investors.
The total amount the city would be required to pay can never exceed $4.5 million, she said.
The social impact bond program will utilize a half-day Child-Parent Center model that works with students and their parents to improve student performance.
“Assuming success at the levels we hope, the estimated rate of return to the investors is 6.3 percent…. That’s a little bit higher than where they would finance on a general obligation basis, but there’s no taxpayer dollars at risk that way …. For the upside estimate of 6.3 percent, they take 100 percent of the downside. I would consider it an attractive financing rate,” Scott told the Finance Committee this week.
“Every single payment to the investors depends on whether the children have been helped. If children do not benefit from the program, the investors get nothing — not even their money back.”
Under questioning from aldermen, Scott said in order to borrow the money itself to expand early childhood education, one of Emanuel’s top education priorities, CPS would first be required to do a feasibility report to prove it can achieve 1.25 times coverage on the revenue stream.
“In this case, revenue would be the savings. And there’s not the ability to show investors we can actually achieve a rate of return because everything is at risk. So, it doesn’t fit neatly into boxes that permit CPS to borrow,” she said.
Comparisons to the parking meter deal stem from high rate or return and the relatively low risk.
“The same type of people came in and said it was a high-risk asset [when] it was a low-risk asset. Look at how we lost on that. We lost billions of dollars,” Ald. Scott Waguespack (32nd) said this week.
“We’re not gonna lose billions here. But, taxpayers under this scheme are gonna pay a lot more than if we just went out and re-allocated resources we already have.”
Beth Berenson of SEIU Healthcare Illinois has argued that Emanuel’s “latest privatization scheme” doesn’t serve enough kids, doesn’t provide long enough hours to serve the children it does enroll and “allows the banking industry place a sure bet on our kids’ educational future for their own profit.”
Kurt Hilgendorf, a policy researcher for the CTU, noted that the annual contribution of $4.25 million from the city and Chicago Public Schools amounts to “less than one-tenth of one percent” of the CPS annual operating budget.
“And yet, we’re saying that the only source of these funds can come from a consortium of banks and philanthropies. This is simply not the case. This is one of the worst ways to fund a program like this,” Hilgendorf said.
Hilgendorf noted that ten percent of the $17 million investment would go toward overhead costs to compensate “four levels of intermediaries” and doesn’t reach the classroom.
“This is a very similar structure to the parking meter deal, to the Infrastructure Trust. These complex financing schemes result often in less efficient delivery of public services,”
“If the $17 million initial investment were to go through at the cap, the consortium of lenders would receive $34.5 million. That’s a doubling of their money in a 17-to-18-year period.”
The $17 million investment over four years will pave the way for Child-Parent Centers in five schools to be expanded while a new center is opened in a sixth school. That will accommodate 374 students, starting in January.