The most straightforward way to finance early childhood programs is to have the government pay for these programs upfront. However, this may not be politically attractive at certain places and times.

I’ve mentioned previously the idea of financing early childhood programs through their effects in reducing later special education costs. Some philanthropists or private investors would provide the money upfront for an early childhood program. Their investments would be repaid by local school districts and state governments through savings in special education costs. Excess savings, if any, would be plowed back into sustaining the financing for early childhood programs. As I mentioned, as of right now, we are uncertain whether this model would work. Are the savings in special education costs sufficient to make this model sustainable? Some experiments or demonstration projects are needed.

However, there are other options for financing early childhood programs through what are sometimes called “social impact bonds” or “pay for success contracts”. (See the work of Jeff Liebman, a professor at the Kennedy School, for a discussion of a variety of possible policy areas in which such bonds/contracts might be feasible.) Specifically, it would be possible for a state government to finance early childhood programs through paying for these programs’ effects on kindergarten readiness.

To give a specific example, a state government could say it would be willing to pay $2,000 upfront per child for a preschool program. But the state government would also contractually commit to paying a certain amount per improvement in test scores at kindergarten entrance. For example, the payment could be $500 for each 1 percentile improvement in average test scores at kindergarten entrance.  A good one-year half-day pre-K program can raise test scores by 10 percentiles or more. (For example, this is implied by Reynolds’s results for the Chicago Child-Parent Center program). A program that raised test scores by 10 percentiles would receive a bonus payment of $5,000 per child. The upfront $2,000 per child plus the bonus payment of $5,000 would be more than enough to pay for one year of a high quality half-day preschool program, which might cost around $5,000, based on data from the Institute for Women’s Policy Research’s publication, “Meaningful Investments in Pre-K”.

This financing scheme might have two advantages. The first is political. In some states’ political situations, tying preschool financing to program performance might be reassuring to some policymakers.  The state only has to make large payments if preschool programs prove to be effective.

The second advantage is substantive.  This payment structure provides strong incentives for good performance.  Programs will only be created and survive if they are able to deliver good performance.  If better results can be obtained from a particular set of program features, such as a more learning-rich curriculum or higher teacher qualifications, there are some positive incentives to adopt those program features. If full-day programs produce much greater results than half-day programs, there are incentives to offer full-day programs.

One possible problem with this “pay for success” plan is whether success can be accurately measured.  As I have previously discussed, for one-year preschool programs for 4 year olds, effects on kindergarten readiness can be accurately measured using “regression discontinuity” evaluation designs. (For pre-K, such evaluation designs in essence  compare test scores of children who are just starting pre-K and just missed the age cutoff for pre-K the previous year, with similar children who completed pre-K the previous year, are just starting kindergarten, and just made the age cutoff for pre-K the previous year. )

A second problem is making sure that the tests used to measure “success” in fact measure what we want to encourage pre-K to do. For example, if we want pre-K to include some emphasis on “soft skills/social skills”, then such tests need to be included in the formula for determining bonus payments for pre-K providers.

A third problem is that although large for-profit providers and public school districts might be able to provide the funding upfront to pay for program costs, before any bonus payments are received, obtaining upfront funds might be more difficult for smaller private pre-K providers. This problem might be in part addressed by providing some state, philanthropic, or private investor financing for smaller pre-K providers.

Given the advantages but possible problems in “paying for kindergarten readiness” contracts for financing pre-K, it would seem appropriate for government policymakers to do demonstration projects to explore this approach’s potential. Perhaps some state will explore doing so as part of their application for federal funds under the competition for the Race to the Top –Early Learning Challenge program.