SALT LAKE CITY (AP) — Goldman Sachs plans to announce this week that it will finance an early education program in Utah — and it expects to make money on the venture.
The investment bank aims to loan up to $4.6 million for a preschool program in Salt Lake City. The idea is to raise the achievement level of thousands of economically disadvantaged children before they enroll in school, thereby reducing the later cost of special education.
The more Goldman Sachs reduces Utah's cost of special education, the more money it will make. It also could lose money if the program fails to hit its benchmarks.
"This is cutting-edge stuff, an amazing example of how we can use capital markets to address social needs," said Alicia Glen, head of Goldman's urban investment group. "Everybody is clear that this is new territory for innovative financing. We won't be able to prove it until we do it."
It's no accident Goldman Sachs is awarding its second "social-impact bond" in Salt Lake City, which has become a growing new business center for the bank, its second-largest after a Wall Street operation. The company held its annual shareholders' meeting last month in Salt Lake City.
Utah spends $2,600 a year per child for remedial services in public schools, and the bank would earn money by reducing the number of kids who need the special education.
The loan will go to the United Way of Salt Lake, which oversees the Utah High Quality Preschool Program.
That program already operates in Park City and in Utah's third-largest school district, Granite, which serves about 67,000 students in the suburbs south of Salt Lake City.
"United Way of Salt Lake is proud to be part of this groundbreaking financing method," said Deborah Bayle, president and chief executive of the organization.
The larger goal is to raise educational achievement to a level where students show 90 percent proficiency in core subjects, she said.
Chicago investor J.B. Pritzker is joining the effort with his own loan of $2.4 million, bringing total financing to $7 million for the Salt Lake City program. The loans will be announced in Chicago on Thursday.
"Investing early and intelligently in the development of infants, toddlers and preschoolers significantly improves educational outcomes," Pritzker said in a statement. "Early learning reduces social and economic inequality and builds a better work force and a stronger nation."
The $7 million program will benefit up to 3,700 Salt Lake City children over a number of years, the United Way says.
Utah gives school districts $2,600 a year per student to pay for special education and remedial services. If the program succeeds in reducing large numbers of children who need these services, Goldman and a Pritzker family foundation will recoup their loans with 5 percent interest. And then, according to the bank, they could take 40 percent of further savings.
The success payments will be made until children targeted by the program leave sixth grade. At that point, savings generated by the program will be captured by the state and school districts.
Salt Lake County Mayor Ben McAdams hailed the program. For every $1 invested by other states offering quality preschool programs, he said, social benefits total $7 through lower education costs, less crime, fewer people on public assistance and higher wages that return to the economy through consumer spending.
"It is the right thing to do for children, and the fiscally responsible course for taxpayers," McAdams said.
This is Goldman Sachs second social-impact loan. In a $9.6 million transaction last year, the bank is financing a program that aims to cut the recidivism rate of 16- to 18-year-olds incarcerated at Rikers Island Correctional Facility in Queens, New York.
Upon release, half of those teens find themselves booked in jail again within a year, "a terrible thing and a vicious cycle," Glen said.
The New York City program is trying to reduce the recidivism rate with programs, services, therapy and post-release counseling for young offenders. The success of the Rikers program has yet to be measured.