It was the fall of 2010, and the finance task force of the Early Childhood Council of Boulder County had worked for the better part of the year to come up with the dollar amount needed to provide high-quality early childhood services to every child in the county.

But after the task force finally nailed down the number, they never released it publicly.

“The number was so big, they were afraid it would terrify the community,” said Bobbie Watson, executive director of the council.

With the recession hitting, the board knew better than to ask voters for a tax increase, much less one capable generating the many millions of dollars the task force anticipated was needed.

Fast forward to November 2013 and the ballot box defeat of the school finance measure Amendment 66, which would have made possible universal full-day kindergarten and thousands more preschool slots for at-risk children. With that funding opportunity gone, Watson and her board quickly decided to pursue an innovative financing model they’d begun to explore.

Called “Pay For Success,” or PFS, it had bubbled up in policy circles for a few years, but is largely untested.

The idea behind the model, which is also sometimes called “Social Impact Bonds” or “Results-Based Financing,” is that private investors—commercial banks or foundations–pay upfront for evidence-based programs, such as high-quality preschool.

In turn, the programs prevent costly interventions such as grade retention or the use of special education services during the child’s K-12 career. If the school district or state realize the expected savings from reduced special education or grade retention costs, the investor is repaid with interest. Thereafter, the district or state reaps any additional savings.

While there are no active Pay For Success programs in Colorado, the concept is gaining traction. The city of Denver and the state now share a fellow from Harvard University’s Social Impact Bond Technical Assistance Lab whose job is to evaluate possible PFS projects. In addition, the Rose Community Foundation has convened a group of about 20 Colorado foundations for ongoing discussions about how they might facilitate or fund Pay For Success projects in early childhood.

Watson, who with her board has hired consultants to lead the Pay For Success planning process, said, ““We’re not talking about this. We’re doing this…This is the only option we see on the horizon that will bring millions of dollars into the birth-to-five space.”

Skepticism, then excitement

If Pay for Success were a child, it would still be in preschool. It was launched first in England in 2010 with a program aimed at reducing recidivism—and thus the high cost of prison stays–by helping freed inmates transition back into their communities

While there are a number of Pay For Success programs in the works around the world, fewer than 10 are actively running. Just one of those—in Utah’s Salt Lake County—focuses on early childhood. In New York, projects focus on adult and juvenile recidivism and in Massachusetts they address recidivism and chronic homelessness. A health care-based program launched last year in Fresno, Calif., aims to cut emergency room visits by low-income children with asthma. None of the programs have reached the pay-out phase yet.

Mary Wickersham, who is one of the consultants working for the Early Childhood Council of Boulder County, said a state senator first proposed a PFS-like concept to her in 2008 when she worked in the state treasurer’s office.

“At the time, I was extremely dismissive,” she said. “It just seemed horribly impossible to me.”

But proponents of the idea, including U.S. Rep. Jared Polis, a Democrat who formerly served on the State Board of Education, kept talking about it and policy-makers, foundations executives and law-makers started listening. Wickersham, director of the Center for Education Policy Analysis at the University of Colorado Denver, is now part of several efforts to move Pay For Success forward in Colorado.

“It’s been an idea that’s really exploded over a short period of time,” said Wickersham.

Part of the appeal of PFS in the early childhood realm is that there’s already a large body of evidence demonstrating the positive outcomes that stem from effective early childhood programs. Because those positive outcomes — from improved school performance to lower unemployment — help save the government money, the idea of staking a claim on those future savings to expand programs now seems to make sense. In fact, many in the early childhood community believe PFS has the potentional to address what they see as chronic underfunding of important early childhood programs.

“In early childhood, [the lack of funding is] even worse than the K-12 education system, if that’s even possible,” said Elsa Holguin, the senior program officer at the Rose Community Foundation who’s leading the coalition of foundations interested in PFS.

Aside from federal child care subsidies and targeted programs like the Colorado Preschool Program, “there’s not a really robust financing mechanism for comprehensive early childhood programs,” said Karen Rahn, director of the Boulder County Department of Human Services.

She believes PFS is a promising finance tool as well as “a way of bringing stakeholders together around an issue.”

Nuts and bolts

Pay For Success deals are complicated transactions that may involve eight or more partner organizations, including investors, government entities, service providers, account managers, evaluators, and an “intermediary” whose job is to recruit investors and manage the overall program. Such projects also require extensive planning and number-crunching to determine the target population and intervention that will provide the savings needed to make the concept successful.

In a hypothetical example, an investor pays a school district to create 500 new preschool slots for low-income children in the hopes of preventing the students from repeating third grade. The contract would establish specific performance targets that would need to be achieved for that cohort at the end of third grade, or approximately five years after the start of the PFS project. If the outcomes do not materialize, the school district would not have to pay back the investors.

Under Utah’s PFS deal, launched last summer, private investors will provide up to $7 million to pay for thousands of new preschool slots for low-income three- and four-year-olds over the next several years. The program is based on data that shows children who attend high-quality preschool are less likely to be identified for costly special education services once they start elementary school. Because children rarely discontinue special education once they are found eligible, reducing their chances of needing services can yield a huge cost savings over the course of a 13-year school career.

Janis Dubno, a Wall Street banker-turned-children’s advocate, started some of the early work on what’s called “The Utah High Quality Preschool Program” in 2010 and said the process required much collaboration among partners. Among them were two school districts, the local United Way, a local community foundation, Salt Lake County, a children’s advocacy organization, an investment firm and two private investors—the bank Goldman Sachs and Chicago philanthropist J.B. Pritzker.

“We were all aligned with what we wanted to achieve,” she said.

Even so, there were stumbling blocks. Legislation that would have enabled Utah’s state government to participate in the deal failed last year and leaders of the PFS effort had to settle for a one-year “proof of concept” approach under which the United Way and Salt Lake County contributed to a repayment fund instead of the state.

“A lot of people in the legislature couldn’t get their heads around this financing mechanism,” said Dubno, a senior policy analyst for the advocacy organization Voices for Utah’s Children. “There was a lot of convincing to do.”

Those efforts paid off this year with the passage of the enabling legislation. It was signed into law on Tuesday.

Movement in Colorado

In Boulder County, the early childhood council will work with its consultants over the next year to determine what type of PFS pilot would work best there. It could be an expansion of an existing preschool program, a home visiting program for families with young children, or something else, said Watson.

“It’s investing in our current capacity and just expanding the bandwidth,” she said.

Boulder County isn’t the only one considering Pay For Success right now. A number of other organizations also crafted PFS proposals last fall in response to a “Request For Information” by the state. All told, 43 proposals came in, with 12 of those focused on early childhood , 14 on disconnected youth, five on homelessness, four on health and even one on forestry.

Among the early childhood respondents were big players like Mile High Montessori and Clayton Early Learning as well as smaller organizations like the two-employee Adams County Youth Initiative. Tyler Jaeckel, the PFS staff member shared by the City of Denver and the state, said the next step in the process is determining the feasibility of the proposals and building the partnerships that would be required to launch them.

One promising proposal came from the Merage Foundations, which proposed an expansion of an existing program called “Early Learning Ventures” that helps small, independent child care providers band together in “alliances” to achieve economies of scale when it comes to business and administrative functions. Sue Renner, the foundations’ executive director, said the program already shows a return of $8 for every $1 invested, has cut state costs for processes like licensing, and has given providers more time and money for quality improvements.

“We know we’re on to something,” she said. “How do we make sure we can scale this and do more of this work?”

While Merage, Boulder’s Early Childhood Council and other interested parties will have to spend months more on data collection and analysis before launching Pay For Success in the state, some observers believe it won’t be a theoretical discussion for much longer.

“It’s in the early stage, but this is going to move fast,” said Holguin. “My goal is let’s position Colorado…to be part of this national wave.”

Not without challenges

While PFS has an enthusiastic cadre of supporters, it has its skeptics too. Some worry that it could represent the privatization of social programs. Others wonder about the intentions of corporate banks that might serve as investors and question whether they should be making a profit off social programs.

Jaeckel said the privatization concern isn’t warranted because PFS money funds non-profit providers or government entities that are already providing services. As for concerns about corporate motives, he noted that commercial investors may care about the social good and see investments in early childhood PFS projects as a way to ensure a quality work force down the road. In Colorado, he added, key PFS investors are more likely to be foundations than Goldman Sachs-type companies.

While investors do earn interest through PFS deals–if the desired outcomes are achieved– the rates are not particularly lucrative. Typically, foundation investors might only get a return of around 2 percent and commercial investors might only get a risk-adjusted rate of around 4 percent, said Jaeckel.

Besides concerns about corporate profits, advocates of PFS initiatives may also have to grapple with the same public perception problems that have sometimes derailed early childhood proposals seeking funding through traditional means.

Pamela Harris, president and CEO of Mile High Montessori in Denver, said, “There’s…this cultural piece that the majority of people think kids should be at home with their moms.”

On top of that is the challenge of getting the public, which may be familiar with K-12 per-pupil costs of around $6,600 a year, comfortable with the higher price tags that often accompany early childhood programs. For example, Harris said, a comprehensive, high quality preschool program can run $9,500-$15,000 a year.

“The cost of quality early education is really high and…that’s been shocking for people.”