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Within the 2015 Every Student Succeeds Act, the K-12 education law that replaced No Child Left Behind, is a provision that provides for the use of federal funds by states and school districts for something known as “Pay for Success.”  The Obama administration has actually been funding Pay for Success programs in education and other areas for years, and Congress likes the concept. It is going to become a big thing in public education over the next few years. So what is it exactly?

According to the Corporation for National & Community Service:

Pay for Success (PFS) has emerged as a new approach for government to partner with the private sector to fund proven community-based solutions. PFS is an innovative contracting and financing model that leverages philanthropic and private dollars to fund services up front, with the government, or other entity, paying after they generate results. This strategy has gained strong bi-partisan support in Congress, as a strategy for increasing return on taxpayer dollars while improving the quality of services provided in our communities.

If it sounds as if it’s a way for the private sector to make money off investments in public education, that’s because it is. Supporters say it is a great way to get private entities to invest in schools that need resources. Critics say it is more likely to help the private entities earn a lot of money than do much for children.

Here’s an example of how it works: A Pay for Success program in Utah funded by Goldman Sachs earned a profit for the global investment banking for every student who went through an early-childhood program and was not referred for special education. According to the New York Times: “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.” But a number of early-childhood education experts who reviewed the program questioned its metrics, the Times reported, and whether the program really was as successful as portrayed. Special education advocates were, of course, alarmed by the program.

Here is a piece that goes into detail about five myths surrounding Pay for Success. It was written by Kenneth J. Saltman, a professor in the Department of Educational Leadership at the University of Massachusetts at Dartmouth, where he teaches courses in the Educational Leadership and Policy Studies PhD program. He grew up in southern New England and taught English as a Second Language in Pusan, South Korea, before graduate school. Before moving to U-Mass Dartmouth, he taught graduate and undergraduate courses at DePaul University in Chicago and St. Joseph’s University in Philadelphia. A prolific author, his newest book is “Scripted Bodies: Corporate Power, Smart Technologies, and the Undoing of Public Education.”

The following is a version of Saltman’s piece on Pay for Success that was first published on the CounterPunch website. You can find the full version here. Saltman gave me permission to reproduce it.

By Kenneth Saltman

Pay for Success, also known as Social Impact Bonds, is being heavily promoted by power corporate entities and politicians as a solution to intractable financial and political problems facing public education and other public services. They include investment banks such as Goldman Sachs, Bank of America, and J.P. Morgan; philanthropies such as the Rockefeller Foundation; politicians such as Chicago Mayor Rahm Emanuel and Massachusetts former governor and now Bain Capital Managing Director Deval Patrick; and professors at elite universities such as Harvard University.

In these schemes, investment banks pay for public services to be contracted out to private providers and stand to earn much more money than the cost of the service. For example, Goldman Sachs put up $16.6 million to fund an early childhood education program in Chicago — yet it could get back more than $30 million (Sanchez, 2016) from the city.

While Pay for Success is only at its early stages in the United States, the Rockefeller Foundation and Merrill Lynch estimate that by 2020, market size for impact investing will reach between $400 billion to $1 trillion (Quinton, 2015). The Every Student Succeeds Act of 2016, the latest iteration of the Elementary and Secondary Education Act of 1965, directs federal dollars to incentivize these for-profit educational endeavors significantly legitimizing and institutionalizing them.

Pay for Success is promoted by proponents as an innovative financing technique that brings together social service providers with private funders and non-profit organizations committed to expanding social service provision. In theory, Pay for Success expands accountability because programs are independently evaluated for their success and the government only pays the funder (the bank) if the program meets the metrics. If the program exceeds the metrics, then the investor can receive bonus money making the program much more expensive for the public and highly lucrative for the banks.

Banks love Pay for Success because they can profit massively from it and invest money with high returns at a time of a glut of capital and historically low interest rates. Politicians (especially rightist Democrats) love Pay for Success because they can claim to be expanding public services without raising taxes or issuing bonds and will only have the public pay for “what works.” Elite universities and corporate philanthropies love Pay for Success because they support “innovation” and share an ethos that only the prime beneficiaries of the current economy, the rich, can save the poor.

Pay for Success began as Social Impact Bonds and were imported into the United States from the United Kingdom around 2010. They were promoted by the leading consultancy advocate of neoliberal education, McKinsey Consulting; the neoliberal think tank, Center for American Progress, which was founded by former Clinton Chief of Staff and Democratic Party leader John Podesta (who also led Obama’s transition and is the chairman of Hillary Clinton’s presidential election); and the Rockefeller Foundation. Pay for Success expansion is now the central agenda of the Rockefeller Foundation.

Shortly before championing Pay for Success for Chicago where he was elected mayor, Rahm Emanuel served as Obama’s chief of staff, having had a long career as a hard-driving Democratic congressman and political money raiser and also an investment banker. Certain other key figures lobbied to expand the use of Pay for Success. Most notably, Jeffrey Liebman went from Obama’s Office of Management and Budget to a large center at Harvard, the Government Performance Lab in the Kennedy School of Government dedicated to expanding Pay for Success. Liebman is both a leader of the Center for American Progress and was a key economic advisor to Obama in his 2008 campaign. Other key influencers of Pay for Success include The Rockefeller Foundation and Third Sector Capital.

Advocates claim that there is value in Pay for Success. They say:

1) It creates a “market incentive” for a bank or investor to fund a social program when allegedly there is not the political will to support the expansion of public services.
2) By injecting “market discipline” into the bureaucratically encumbered public sector, Pay for Success will make the public sector “accountable” through investment in “what works” and it will avoid funding public programs for which the public has “little to show,” as Liebman and Third Sector Capital Partners are fond of suggesting (Wallace, 2014). The value of any public spending in this view must be measurable through quantitative metrics to be of social value.
3) It consequently saves money by not funding programs that cannot be shown to be effective.
4) It shifts risk away from the public and onto the private sector while retaining only the potential social benefit for the public.
5) And lastly, it mobilizes beneficent corporations, banks, powerful non-profit companies, and philanthropic foundations to save the poor, the powerless, and the public from themselves. Here, Goldman Sachs frames its profit-seeking activities as corporate social responsibility, charity, and good works that define its image in the public mind.

In fact, all five of these positions that advocates claim explicitly or implicitly to support the expansion of Pay for Success are baseless.

Myth 1: Market Discipline

Repeating a longstanding neoliberal mantra of private sector efficiency and public sector bloat, advocates of Pay for Success claim that the programs are necessary because they inject a healthy dose of market discipline into the bureaucratically encumbered and unaccountable public sphere.

According to Liebman, who is the leading proponent of Pay for Success, private sector finance produces this market discipline because governments do not monitor and measure the services provided by contractors. Liebman said, “(Government) Programs that don’t produce results continue to be financed year after year, something that would not happen in the business world” (Overland, 2011).

This is an odd claim from one of Obama’s leading economic advisors at the time that Obama was sworn in as president and proceeded to have the public sector bail out the private sector. The 2008 financial bailout of the banks by the U.S. federal government represents a repudiation of the neoliberal logic of the natural discipline of markets and of deregulation. The private sector including banks, insurance companies, and the automotive industry needed the public sector to step in and save unprofitable businesses and businesses that had invested in the deregulated mortgage backed securities markets.

More broadly, some of the largest sectors of the economy such as defense, agriculture, and entertainment rely on massive public sector subsidies to function. Specifically, the financial crisis and consequent recession was a result first of neoliberal bank deregulation and a faith in markets to regulate themselves. But it also demonstrated the illegal activity, fraud and lies of some of the same banks that now seek profit through Pay for Success.

Pay for Success proponents claim that the financing scheme is necessary because there would otherwise not be the political will to do projects such as early childhood education in Chicago for a couple of thousand children or recidivism reduction programs in Massachusetts. Third Sector Capital Partners, a non-profit that relies on Pay for Success expansion as a cornerstone of its business, claims that Americans do not support state spending and hence Pay for Success is necessary (Von Glhn and Whistler).

However, Gallup shows that 75 percent of Americans favor expanded public spending on infrastructure (Newport, 2016a) and 58 percent support replacing the Affordable Care Act with a universal federal healthcare system (Newport, 2016b). Indeed, as longstanding studies — and more recently the Bernie Sanders presidential campaign of 2016 — indicate that a large percentage of Americans support a range of increased spending on progressive social programs.

Parents and community members are not the ones who lack the political will.

Myth 2: Transfer of Risk from the Public to the Private

The elaborate involvement of banks, lawyers, profits, and non-profit coordinating companies appears more than superfluous when one takes a closer look at what is being done with Pay for Success in Chicago through the expansion of pre-K to 2,600 Chicago public school children.

Chicago Mayor Rahm Emanuel’s office lists six schools on the west and south sides and reports, “CPS and its teachers will manage the expanded program in these schools for the current academic year and expand to additional schools in future years”(Mayor’s Press Office). If the program simply expands existing CPS programs with already employed teachers and administrators, then the potentially significantly higher cost of using the Pay for Success makes little sense. In other words, why not just expand the existing successful services such as the parent-child centers that had been successful in Chicago since 2002?

According to the mayor’s office, the risk is worth it because Pay for Success “is structured to insure that its lenders, the Goldman Sachs Social Impact Bond Fund and Northern Trust as senior lenders, and the J.B. and M.K. Pritzker Family Foundation as a subordinate lender, are only repaid if students realize positive academic results” (Mayor’s Office).

However, critics of Pay for Success point out that in reality there is little risk for investors of losing that nearly $17 million because the investors select already proven projects such as those in Chicago (Sanchez, 2016). As Melissa Sanchez of Catalyst Chicago points out, investors make not only big profits but additionally receive positive public relations, good will, and image boosting (Sanchez). This is not a small matter for a bank such as Goldman Sachs, which was in the center of the sub-prime mortgage crisis and was found to have committed both illegal and unethical investment practices.

Risk is also mitigated for the banks by philanthropies such as Rockefeller or Bloomberg that guarantee repayment of the money the banks invest (Quinton). Even the proponents admit that Pay for Success is “not a panacea” as banks are not really willing to take risks and consequently they are only willing to consider about 20 percent of service providers (Overland). The attractive service providers are ones with established track records that all but guarantee success. Pay for Success cannot be justified as an innovative scheme that transfers the risk taking of the market into the public sector while transferring financial risk out of the public sector and onto markets.

Economist David Macdonald points out the extent to which the promise of risk transfer is in fact untrue. Macdonald explains that Pay for Success is not experimental. He argues that a bank such as Goldman Sachs is never going to put up $5 million with a 50 percent risk of losing their money, and so it will invest only in proven projects. Moreover, even if Goldman were to take a risk and the metrics did not pan out in its favor, there’s no way the government will refuse to pay Goldman Sachs back the full $5 million. Why? Because if Goldman Sachs loses $5 million or any part of it, it’s not going to come back next year, and neither are any of the other bankers and private investors. (Macdonald, 37)

Yet, even with the risk to bank profits eliminated by highly selective program selection, underwriting by philanthropies, and the government’s desire to keep the bank coming back, as the Chicago example highlights, even if the leveraged Chicago Public Schools District goes bankrupt, banks such as Goldman Sachs are first in line as creditors as the pieces of the system are sold off (Joravsky). So rather than a system that injects the risk taking of markets into the public sector, Pay for Success injects capital drainage into successful programs while assuring minimal risk only for the profiteers. As Macdonald writes, the inversion of risk represents a disturbing change in who government serves.

Myth 3: Accountability

Proponents also claim Pay for Success programs are more accountable than the public sector because allegedly programs are measured independently. As the principles of Third Sector Capital write, “Outcomes need to be tangible and measurable, such as reduced recidivism rates and lower utilization of foster care placement. The analyses of fiscal savings need to be demonstrated in quantifiable numbers, such as a reduction in special education dollars, lower Medicare payouts and lower juvenile justice expenditures” (Von Glahn and Whistler, 22).

Yet critics of Pay for Success have raised issues about who is making the decisions about measurement and how benchmarks have been decided (Overland, 5). A basic problem with this argument for accountability through measurable outcomes is that, in practice, as a juvenile justice caseworker involved in a recidivism reduction Massachusetts Pay for Success project explained to me, s/he received constant phone calls from an investment bank encouraging him/her to have the metrics turn out in the favor of the bank so that the bank would earn the maximum amount possible through the bond. Indeed, what I heard directly from a participant in a Pay for Success was a general concern of Jon Pratt, head of the Minnesota Council of Nonprofits. Pratt stated, “You’re definitely creating incentives that would be considered corruption pressures.” Pratt’s point is that by having allegedly independent measurement tied to the possibility of profit or loss, a not-so-independent incentive is created to game the outcomes or cheat.

Other critics raise practical concerns with Pay for Success, including concern that organizational capacity of a service provider can be temporarily built up by a contract but “not build the organizations’ capacity to support that growth” (Wallace, 4). As well, critics point to how time-consuming these agreements are to create (Wallace, 4). Contracts are so convoluted and complicated that what normally would take a month to do takes two years and with financial arrangements so complicated that a university professor in financial management “still needed help understanding the financing” (Farmer).

In Chicago’s Pay for Success early childhood project, as the commissioned evaluation report makes clear, not only had this particular project received positive evaluations since 2002, but early childhood education interventions such as this Child Parent Center model have been measured and found to have positive effects on future academic performance since 1967 (Gaylor, 16). Unsurprisingly, that is, early childhood learning initiatives have been known to result in measurable improvements in student performance in subsequent academic years. These facts raise obvious questions as to Pay for Success advocates’ claims that private bank financing is needed to assure measurable accountability.

The message from the leaders of Pay for Success is that the government spends billions of dollars on public services that are not measured and hence has “little to show for it” (Wallace, 2). Implicit here is an assumption that that which cannot be immediately measured quantifiably also cannot be justified as a public expense. This presumes that the kinds of subjects that are less quantifiably measured such as the humanities or abstract sciences are less valuable and that funding in the future ought only to follow that which can be quantified.

The denial of interests and values renders the measurement obsession of accountability pseudo-science or scientism. For example, Goldman Sachs, J.P. Morgan, and Bank of America have all been seeking profit in Pay for Success. Each bank has paid the U.S. Department of Justice multi-billion dollar settlements for their activities in the run-up to the 2008 subprime crisis and great recession (Shen, 2016).

In 2011, Goldman Sachs sought 22 percent profit on its investment of $9.6 million in a Riker’s Island Pay for Success project teaching moral reasoning to juvenile inmates (Quinton). The efficacy of the project was to be measured by reducing recidivism. Shortly after lying and breaking the law for profit, Goldman Sachs received a contract from then New York City’s billionaire Mayor Michael Bloomberg. Bloomberg’s own philanthropy backed the Goldman Sachs investment so that, should the metrics not pan out, the bank would not lose money. While this particular Pay for Success project did not achieve the metrics, the value of the metrics themselves as an arbiter of the value of the project are profoundly suspect in that they shut down some of the most crucial questions that need to be asked of such a project including, “Why would a company that contributed to the sub-prime mortgage crisis be hired to teach moral reasoning to youth?”

Myth 4: Cost Savings

A central argument of Pay for Success proponents is that they save money by only funding successful programs. However, as the prior sections suggest, if in fact evaluation is not independent and only already successful programs are being selected, and governments have incentives to continue contracting, and there are “corruption pressures,” then the alleged “market discipline” through competition cannot work. Yet, there is additional evidence that Pay for Success adds costs rather than cutting them.

Pay for Success introduces large expenses to fund extensive legal services to handle those convoluted and complicated contracts that take years instead of months (Sanchez 2014). Additionally, third-party project managers and evaluators add costs to the services (Sanchez 2014). If the metrics pan out for the investors, then they can earn more than double the money that they put up for the service (Sanchez, 2014, p. 2). The intensely time-consuming and convoluted deals cost more money for administration, and this cuts into the spending on the service itself (Wallace, 2014). The Department of Legislative Services in Maryland studied Social Impact Bonds for recidivism reduction programs and found no savings (Wallace, 5). For prisons or schools with fixed costs such as physical sites, saving in per inmate or student cost is not significant because it does not reduce the fixed costs (Wallace, 5).

Finally, a cost problem with Pay for Success is that, as critics contend, with private sector lenders involved, interest rates will tend to be higher than with public sector bond issuance. House Appropriations Committee Chair Representative Ross Hunter blocked a federal Social Impact Bond bill. He said, “As a private investor, what kind of interest rate are you going to ask for? Eleven percent? Nine percent? By contrast, interest rates on revenue bonds can be as low as 4 percent. If early learning is a good idea, I can issue [government-backed revenue] bonds to pay for it” (Hoback). In Chicago, Goldman Sachs’ could more than double their initial investment of $16.6 million (Sanchez 2016) as the metrics determine that Goldman receives the maximum amount from the city under the agreement. This is a much higher total cost to the public to provide the service to 2600 children than what a bond issuance would be.

Myth 5: Corporate Social Responsibility

In order for banks, corporate foundations, and venture philanthropies to claim that Pay for Success represents the good will of these actors, they must represent public sector pillage as public sector support and care. However, they must also position these private accumulation projects as necessary, inevitable, and without alternative. This is why proponents repeat the private sector language about the “hopelessly bureaucratic public sector” needing “market discipline,” private sector “cost savings,” “accountability,” “financial innovation,” and “risk reduction” despite evidence and reason to the contrary.

The private sector project of Pay for Success is not merely one that involves the private capture of public wealth but also the public reframing of symbolic meanings that make such wealth capture possible, remaking common sense in ways that suggest that only the rich can promote just social change by pursuing their financial interests. Such ideologies suggest that the very private forces responsible for draining and weakening the public are in fact saviors for the public, that there is no alternative to markets in every social realm, that public citizens are nothing more than economic actors, and that these projects are apolitical rather than representing the interests and perspectives of capitalists over workers and most citizens.

Non-profits such as the Center for American Progress and the Rockefeller Foundation are among the loudest boosters of Pay for Success. The ideological work that these organizations do shapes public perceptions about the morality and public impact of private sector organizations like Goldman Sachs. In this sense, Pay for Success is a form of public relations for banks that the banks largely do not have to pay for.

In fact, Pay for Success facilitates banks being paid by the public to promote this public relations bonanza. As with venture philanthropies, the public ends up not only financially subsidizing private banks but also subsidizing the loss of public control over public governance for public services. With venture philanthropies, the subsidy takes public revenues in the form of tax breaks for rich donors and corporations. With Pay for Success, the public pays a premium for services that could have been provided directly through the government and loses democratic governance control over the service.

Conclusion

Pay for Success/ Social Impact Bonds appeal to banks for their capacity to generate profits from public tax money for education, juvenile justice, and other services and they represent a form of economic redistribution from desperately needed public money for the most vulnerable citizens such as poor youth to business.

They also appeal to banks who have gotten caught defrauding investors and that can now promote themselves as doing good works while turning a profit. Pay for Success also appeals to neoliberal politicians such as Mayor Emanuel in Chicago who can claim they are doing “innovative finance” in the interest of taxpayers instead of raising taxes or issuing educational bonds. The reality is that supporters are just kicking the can down the road as Pay for Success does not solve the historical failure to adequately fund public education or other social services, just adding to the longstanding debt burden. In fact, because it costs more, Social Impact investing raises this debt burden while delaying it, thereby destabilizing the public system further.

In this sense, Pay for Success is an elaborate form of public relations that makes a failure to address a public problem look like innovative action.

References

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