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Vogel: Social Impact Bonds

According to the latest research, 47% of children entering kindergarten are not ready to learn to read. And there’s a 90% chance that a poor reader at the end of first grade will always be a poor reader. Fortunately, we now have the tools to break this pattern and can do it in a way that would not cost taxpayers in Vermont any money.Research tells us that 80% of the brain develops in the first three years of life, so it is critical that preschool teachers get good literacy training. And it turns out that one of the leading organizations in the country that works with children around the neuroscience of learning is located in Vermont.

The Stern Center in Williston has developed a program called Building Blocks for Literacy designed specifically to enable preschool teachers to teach young children the pre-literacy skills they need based on the latest research.

Training preschool teachers, of course, costs money – but that’s where a new funding instrument comes in. It’s called Pay for Success Contracts or Social Impact Bonds, and the idea is that an entity, usually the government, pays for results rather than activities. New York, Utah and Massachusetts have already issued Social Impact Bonds for things like prisoner recidivism and early childhood education.

Here’s how a Social Impact Bond might work in Vermont based on a bond that is currently being finalized in Idaho. It begins with the fact that if children come to kindergarten ready to read, they’re less likely to require special education classes which are expensive. In 2014, Vermont spent $266 million dollars on special education.

So in Vermont we might get private investors to invest $10 million over five years in a pilot program to train preschool teachers. Then a qualified entity like the Stern Center would be hired to do the training. An independent monitor would track the number of children enrolled in special education classes each year and compare it to current levels.

The State would only have to pay for success - meaning investors lose their investment if there is no improvement. However, if there is a significant reduction in the number of children in special education classes then the department of education would pay investors their money back plus some predetermined rate of interest.

If the program succeeds, the savings in special education costs could be two or three times the $10 million repayment to investors. So from the State’s perspective and that of Vermont taxpayers, this should be a no lose proposition.

But the real winners, of course, would be the children.

John Vogel is a retired professor from the Tuck School of Business. His tenure at Dartmouth began in 1992, where he taught Real Estate and Entrepreneurship in the Social Sector, among other subjects. He was named by the “Business Week Guide” to Business Schools as one of Tuck’s “Outstanding Faculty” members.
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