Photo: Alessandra Hartkopf for Strategies for Children

Preschools and investment banks seem to be worlds apart, but this month Goldman Sachs announced that it would use a “social impact bond,” to invest in high-quality early childhood programs in Utah and serve some 3,500 children.

Piloted in the United Kingdom in 2010, social impact bonds loan private money to effective public programs.

In Utah, Goldman Sachs is working with Chicago investor J.B. Pritzker and the United Way of Salt Lake to offer $7 million in loans to pay for the expansion of preschool programs that enroll at-risk children.

“Early childhood education is what brought me to the table. As someone interested in social policy, what a great way to solve social problems,” Pritzker told Crain’s Chicago Business. He added: “There are portions of people’s portfolios invested in low-return opportunities, like treasuries. If you can prove this out, Goldman, Fidelity and other investors who put large amounts of capital into bonds, they could put them into social-impact bonds.”

“This is cutting-edge stuff, an amazing example of how we can use capital markets to address social needs,” Alicia Glen, head of Goldman’s urban investment group said in an Associated Press story. “Everybody is clear that this is new territory for innovative financing. We won’t be able to prove it until we do it.”

And in a Huffington Post op-ed co-authored by Pritzker; Deborah Bayle, the president and CEO of the United Way of Salt Lake; and Goldman Sachs’ Glen, the partners write, “We believe this model holds promise because it is scalable, replicable and sustainable. It provides a new framework for thinking about how the public and private sectors can work together to address pressing social needs in a way that results in better outcomes for children, alleviates some of the financial burden on taxpayers and generates savings for governments.”

As a fact sheet on the initiative explains, “there is no upfront cost to the taxpayer or other funders.” Instead, private money and public funding will be used to repay the loans “based on the cost-savings associated with the reduced use of special education and ancillary services.”

For example, Utah school districts receive approximately $2,600 per year per child to pay for special education services. But if Utah’s social bond preschool programs result in fewer children requiring special education and remedial services, then 95 percent of this money ($2,470) will go to repay the loan. These so-called “pay for success” loan repayments are made through the sixth grade.

If no savings are earned, taxpayers and the United Way are not responsible for repaying the loan. As this Fast Company website explains, the risk involved in using social impact bonds remains with the investor.

If, however, the program succeeds, it could make a huge impact by helping children thrive, saving money, and repaying the loan. This would demonstrate to future investors that the model can work – and that solving social problems can be both humane and financially sound. Pritzker expects low but definitive returns of five percent.

This project is also part of the Early Childhood Innovation Accelerator, which “seeks to improve the lives of children from birth to age five by breaking down barriers to increased state and federal support for high-quality early learning programs.” Funded by the J.B. and M.K. Pritzker Family Foundation, the Accelerator “seeks to stimulate innovation and unlock greater private investment for efforts aimed at disadvantaged infants, toddlers and their families.”

This is the second social impact bond project for Goldman Sachs. Its first one is designed to keep previously incarcerated teenage males from returning to prison.

Goldman Sachs is not the only organization focusing on social impact bonds for early education. ReadyNation – a national coalition of business leaders advocating for early education investments – has also been exploring this unique finance model. The group has conducted extensive research on social impact bonds for early education and early health and offers a wealth of background knowledge and resources on its website.