A frequent complaint about US charter schools is that they have an incentive to minimize costs. Districts and states determine schools’ income based on the number of students they serve, and school profit is the difference between total funding received and the total cost of serving students. In this way, minimizing costs maximizes profits but risks devaluing learning.

What if funding were linked not to the number of students served, but to positive educational outcomes achieved?

The pay-for-success (PFS) financing model may be a foundation to build on. If a program achieves specified targets, the service provider is paid, often at a higher rate than in traditional fee-for-service contracts; if the service fails to meet its targets, the funding agency is not liable for the costs.

PFS projects are underway across the country. A preschool program in Chicago released interim results last year showing the project met initial targets and triggered the first success payment to investors. Meanwhile, a program in New York to reduce recidivism did not produce measurable impact, and the funding agency was not liable for program costs. In both projects, the PFS approach worked as designed.

Financing schools based on a PFS model could bridge the enormous gap in our national debate over the future of public education. Proponents of school choice point to stagnant student performance despite increases in per-pupil spending. Opponents fear that public support will simply line investors’ pockets at the expense of student learning.

PFS financing would encourage schools to experiment with new methods while guaranteeing that investors are paid only if students succeed.

Selecting Measurable and Achievable Outcomes

To ensure that schools earn sufficient revenues to fund their operations on an ongoing basis, success payments would have to combine achievable short-term and long-term outcomes. While payments for short-term outcomes would keep the lights on, the promise of payments for longer-term outcomes would encourage schools to innovate. Outcomes could include:

1. Improved test scores. Schools might earn success payments based on the number of students who improve their standardized test scores each year or based on the number of students who graduate.

2. Enrollment in post-secondary education. Success payments could be linked to student enrollments in college and trade schools. Additional payments for completion of post-secondary education would encourage schools to ensure that students both gain admission and are prepared to succeed.

3. Adding “multipliers” to serve at-risk students. One risk in paying for outcomes is that it could encourage schools to serve only those students already on track to succeed. But adding multipliers—increased returns for serving targeted populations—to success payments would encourage the recruitment of at-risk students. For example, a school’s payments for serving a student who is eligible for free or reduced lunch could be valued at three or four times those for a student from a high-income family. This might incentivize schools to serve a variety of students—some low-risk, whose success would ensure a minimum level of revenue, and some high-risk, who would drive up profits for the school if they continue on with their education. This approach could even serve to reverse increasing segregation in schools.

4. Target funding at the state and national levels. Another way to address questions of equity would be through state and federal education budgets. The currently dominant model—in which nearly half of school funding comes from the local level, primarily through property taxes—ensures that schools in wealthier communities have access to greater funding. State and federal agencies could supplement this system by directing PFS funding to targeted areas.

Once PFS outcomes were established, participating schools and school systems would be responsible for determining how best to achieve them. Instead of prioritizing cost management, schools might invest in better teachers. Or they might commit resources to involving parents more actively in student learning.

Creative Adjustments

While adopting a PFS model could produce a more effective education system, implementation would be arduous. Public officials would need to convene stakeholders to identify desired outcomes, agree on evaluation instruments, and structure payment plans. The payoff would be a system that incentivizes creative approaches to educating students in ways that standardized testing alone could never achieve. By adjusting existing policies rather than creating entirely new ones, officials could overcome many hurdles to implementation, such as:

1. Tracking outcomes over time is hard. Following students over time—let alone across state boundaries—will prove enormously difficult. Also, collecting and reporting any data beyond the jurisdiction of the school raises questions about student privacy. In a series of interviews I conducted with PFS professionals, the most commonly cited challenge was collecting and organizing data across agencies. Practitioners discussed difficulties structuring data-sharing agreements, achieving compatibility in recording and storing data, and building capacity among government analysts to organize and analyze data.

The nonprofit advocacy organization Data Quality Campaign (DQC) may have a solution to these challenges. In 2005, DQC identified what it called “10 Essential Elements of Statewide Longitudinal Data Systems.” The first element was a unique student identifier that would stay with students throughout their education, connecting their activities and levels of performance over time. All 10 of DQC’s elements were incorporated in the 2007 federal America COMPETES Act, which codified 12 “required elements of a statewide P-16 education data system.” A significant majority of states have integrated these elements into their data reporting systems. However, it remains unclear to what extent these systems can track student progress across state boundaries.

2. Administrative costs will rise. Making schools responsible for tracking student progress post-graduation may reduce public administrative costs, but it raises privacy concerns. What data would school operators be allowed to collect? What would they be able to do with that information, and how would they protect it? If, instead, public agencies are responsible for tracking students, they would bear the cost of collecting, storing, and protecting the data. Taking such a step requires that officials be able to justify the increased expenditures over the status quo.

Extensive research has demonstrated that individuals who complete high school are less likely to rely on public resources and more likely to be economically productive. So while widespread implementation of a PFS model could very well increase administrative costs, especially in records management, a reduction in societal costs would surely more than compensate.

3. Budget analyses must account for dispersed effects across government. Another challenge PFS models face is an unequal distribution of budgetary impacts to various governmental agencies. For example, at the federal level, higher productivity may produce higher tax receipts and lower expenditures on programs like Medicaid. Yet while net benefits accrue at the federal level, states might experience net costs as increased tax revenues fail to compensate for higher expenditures on primary and secondary education.

This challenge is called the “wrong pockets” problem. In essence, one agency (or level of government) bears the cost of an intervention while another enjoys the benefits. Or, alternatively, the costs are borne today while the benefits take years to materialize. Staggering success payments could address the latter problem, but would do little to solve the former. At the same time, making the problem of how to account for program impact visible and explicit could compel public officials to acknowledge that evaluating public spending based solely on inputs to and outputs from a sharply demarcated and narrowly defined educational system fails to consider the broader economic effects public programs can have on society.

The problem, then, is less about how to minimize costs for a particular program (such as higher administrative costs for tracking students) and more about how we account for the societal effects of government spending more broadly.

4. Schools need start-up capital. How would schools committed to a PFS model secure initial financing? One approach might be government “start-up capital” in the form of low-interest loans. The federal government is already supplying grants for PFS projects with appropriations made available through legislation, such as the 2007 Every Student Succeeds Act and programs like the Social Innovation Fund. A growing number of states are also experimenting with PFS projects. Making loans available to schools would be a logical next step.

Pilot Now, Scale Later

Given the existing polarization around public funding for education, advocating an immediate, system-wide change would be a fool’s errand. But establishing agreements with a few pilot schools could serve as a starting point. Then, if the model showed early potential, a small percentage of federal and state funding could be directed to expanding it. Future funding levels could then be adjusted based on results. Such an incremental approach would both demonstrate its viability to skeptics and enable officials to rework the model as unexpected challenges arise.

In any case, serious experiments with a PFS model could help shift the national debate over funding for schools away from accusations of failure and ground competitions to succeed in producing the educational outcomes that arguably every approach to education pursues.

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