Goldman Sachs' social impact investment showed successful result in Utah

Goldman Sachs found its pre-kindergarten program in Salt Lake City had worked for both sides: the state, and the company itself.

The program was conducted by Utah Voices for Children and was set to expand the spots in the program for 600 children. All of the children involved in the program were from low-income families, and 110 were expected to need special education in elementary school.

The program was Goldman's second experimental method of financing social services. Goldman's first social impact bond in the US failed.

The $9.6 million program, according to Reuters, was to reduce recidivism among teenagers at New York's Riker island Jail.

The company paid up to $4.6 million for the pre-kindergarten program. Goldman Sachs was being joined by the Chicago Investor J.B. Pritzker, who provided a subordinate loan of up to $2.4 million. The total financing of this program was $7 million.

The loans carry an interest rate of 5%, which is paid along with the principal only if the program is successful.

The investment's success is measured by the level of cost savings when children do not need to use special education services, which are financed by the state.

The students were part of the financial experiment.  When the students were tested this year, after a year in a preschool program in which Goldman put up money, and found not to need extra help, the State of Utah paid Goldman most of the money it would have spent on special education for children.

The tests have showed a successful result. When a group of  110 children that were identified as having special educational needs was tested, only one needed special education.

Vox estimates that the program allowed the State to save as much as $281,550.

Goldman and Pritzker received a total payout of around 95% of those savings, or $267,473, with additional payouts to follow if the students continue not to need special education in grade school.

For Goldman Sachs, the program was not only to gain financial profit but also could gain a relations benefit of social impact bonds.

The social impact bond is a relatively new idea for companies. The idea is now spreading quickly. About 40 social impact bond projects are now underway, seven in the U.S.

The Utah prekindergarten program so far is the first American success for social impact bonds.

Nevertheless, such program has had some critics.

Laurie Levy stated on Chicago Now that making a profit in education is intrinsically wrong. If the program is great and will save money, the children should be the total beneficiaries of the profit.

The money that the state paid to investors could be used for schools to improve education services.