Pay for Success – a Study in Applying it to ECE Programs

by Sarah Steffes, Urban Leaders Fellow, Senator Mike Johnston’s Office

Sara Steffes

This summer, I was one of twenty Urban Leaders Fellows selected from across the country to work in Senator Mike Johnston’s Office on a relevant public policy issue ranging from education to criminal justice with a local community organization. I worked with Denver’s Early Childhood Council to help develop their local policy expertise and with a team from Sen. Johnston’s Office to figure out how to implement a successful state-level Pay For Success project.

We know that high quality early childhood initiatives make a tremendous, long-term impact for children, families and communities, yet we have lacked the significant funding needed to invest in the early years in this state. As a result, policymakers from Colorado have joined the Pay For Success innovation happening in other cities and school districts nationally, passing a Pay For Success bill (HB 15-1317) in the 2015 legislative session, which enables the state to become involved in Pay For Success contracts.

Essentially, Pay For Success (PFS) projects, or social impact bonds, are a method of social innovation funding. The idea behind Pay For Success is that government entities have a vested interest in promoting the well-being of constituents but do not have the funding to pay for all programs. PFS allows for a government entity to fund programs that successfully save them money in the long run. The risk is on the investor rather than the government entity.

Here is a basic description of how PFS projects work:

  • Service providers come together with intermediaries and investors to respond to a government entity’s RFP (Request for Proposal).
  • If the government entity believes the project will provide it with cost savings, the government entity may enter into the contract
  • The government entity writes specific metrics into the contract
  • If the metrics are met, the government entity repays the provider (based on a pre-decided rate of return) who then pays the investor
  • If the metrics are not met, the investor eats the cost of the program

Senator Johnston charged my team of Fellows with researching the connections between PFS and early care and education in other states and in CO. We interviewed multiple experts on the topic and developed a three-tiered approach to creating a framework for a successful first project:

We divided Colorado into five regions and looked for a region with:

  • low availability (the capacity of child care programs compared with the population under age five)
  • low affordability (the cost of child care compared with the median household income)
  • and the presence of quality child care programs (based upon Qualistar/Colorado Shines ratings) in order to find a region that demonstrated need and the ability to expand upon or replicate successful programs

The Front Range was the winner for an initial project. We explored high quality programs along the Front Range to compile a framework for an ideal early childhood program for a PFS project. We examined the contracts of the two PFS-ECE projects currently in effect nationwide, taking into account their strengths and pitfalls, to create the tenets of a state-funded Colorado PFS contract.

We came across a few challenges, including the complication of who benefits from cost savings with ECE, and therefore who pays, should the project be successful, as well as the long length of time it takes to create a PFS contract between the government and investors. Making sure this process is both understood and streamlined is important and should be considered in next steps.

We hope that the provider and contract frameworks that we created will be a starting-off point for a successful first early childhood Pay For Success project in which the state is payer, and that PFS becomes a new, innovative option for funding early childhood in Colorado. We have so much to gain from early childhood-focused Pay For Success projects. Ensuring that we can get the ball rolling with successful ones is crucial.

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