The Education Gadfly Weekly

McKinsey & Company research consultants describe the potential of social impact bonds (SIBs) as an innovative financing tool for scaling social programs. An SIB is a “bond” in the sense that private investors supply capital to realize financial return. An SIB is “social” in that the investment capital is used to “scale up” social service programs to increase their reach and social impact.

SIBs differ from traditional social sector financing in two ways: First, SIBs are vehicles to grow proven intervention programs. Since governments tend to fund remediation programs (e.g., incarceration) and private philanthropy gravitates toward funding start-ups or capital projects, operating funds for scaling intervention programs remains scarce. SIBs would fill this financing void.

Second, unlike traditional social sector funding, SIBs involve a financier and private investors—which could range from pension funds to mom and pop investors. Traditionally, social sector funding has been one-directional, with a government or philanthropic entity directly financing a nonprofit. Under the SIB framework, additional actors are involved: a financier sells “bonds” to investors who fund the social service provider. If the service provider meets its service performance objectives, a governmental entity reimburses the financier who, in turn, returns the investment plus interest to the investors. The involvement of additional stakeholders increases the flow of funds, but also increases the complexity—and cost—of financing social programs.

The United Kingdom has already pioneered the use of SIBs to scale up services for disadvantaged youth. And last summer, the State of Massachusetts began piloting SIBs to finance homeless and juvenile delinquency intervention programs. Because these programs are new, McKinsey wasn’t able to measure the effectiveness of SIBs in improving social outcomes; however, they do provide evidence from pro forma analyses that indicate, in the long-run, SIBs could provide net benefits to both taxpayers and society.

Could educational institutions benefit from SIBs? As McKinsey portrays it, public schools don’t appear to be eligible candidates for SIB-based financing, for they are governmental institutions with the authority to issue public debt. SIBs, however, may be a useful means of financing nonprofit educational programs—perhaps even charter schools. SIBs could increase private investment to enable the most effective charter school organizations to scale their operations; for example, an organization like KIPP could back SIBs that enable it to open and operate more schools across the country.

Although the Center for American Progress considers SIBs too “risky” for charter school financing, the idea merits further consideration, especially for charter school operators or authorizers who have a proven track-record of success. An SIB backed by an effective charter (triple-A rated, in business terms) benefits the charter operator who seeks greater scale and social impact, while also offering private investors an opportunity for monetary gain in a lower-risk. As a concrete first step, the friends of school choice should follow McKinsey’s analyses and conduct a pro forma cost-benefit analysis of charter school SIBs to establish whether SIBs present a sustainable financial model for proven charter school operators.    

From Potential to Action: Bringing Social Impact Bonds to the US
McKinsey & Company
Laura Callanan, Jonathan Law, and Lenny Mendonca
May 2012

Over the past few years, much has been made of students’ “time in learning”—whether more time on task while in class, extended school days, or more days in school each year. Yet little attention has been paid to chronic absenteeism—missing more than 10 percent of a year’s school days—mainly because few states track these data. Instead, most states report average daily attendance, which can mask high levels of chronic absenteeism. This exploratory study parses attendance data from six states (FL, GA, MD, NE, OR, and RI) and finds that, on average, 14 percent of students are chronically absent. To put this in perspective, if extrapolated to the national student population, the U.S would have more chronically absent students than charter school students.

In addition, this report offers information about who is most likely to miss class. The researchers found that low-income students are most likely to miss a lot of school, as are the youngest and oldest students. High-poverty urban areas see up to a third of their students miss 10 percent or more of their courses each year. Absenteeism is also a problem in rural poor locations. But neither gender nor ethnicity appears to play a role in chronic absenteeism.

In Ohio, as discussed in Building a Grad Nation, we need to do a much better job at tracking and solving the problem of chronic absenteeism. Although there are a couple of programs that are implemented at individual schools, Ohio has no state-wide absentee-reduction program. One school that has initiated an absentee-reduction program is Hamilton Township High School, which started pairing administrators with struggling students to reduce the risk of absenteeism and possibly dropout. In a more controversial policy, Dohn Community High School in Cincinnati paid seniors $25 and underclassmen $10 per week to arrive to school on time, behave, and do work. More examples of what other states are doing to combat chronic absenteeism can be found here. 

The Importance of Being in School: A Report on Absenteeism in the Nation’s Public Schools
Robert Balfanz and Vaughan Byrnes
Johns Hopkins University, Center for Social Organization of Schools
May 2012

The U.S. Chamber of Commerce’s Institute for a Competitive Workforce (ICW) examines school boards in 13 cities to see how the business community has played a role in school governance. The cities profiled were Atlanta, Austin, Bismarck, ND, Denver, Detroit, Duval County, FL, Laramie, WY, Long Beach, CA, Los Angeles, Newark, NJ, Pittsburgh, Seattle and Fordham’s hometown of Dayton, Ohio.

School boards impact education big time. They are involved in everything from setting policies on teacher evaluation systems, to hiring district leadership, to negotiating collective bargaining agreements.

The Chamber report analyzed the challenges and successes of school boards in cities with challenging social, political and fiscal issues. The authors studied cities that are in various stages of growth, or in some cases, decline.

Dayton, the only Ohio city profiled, is as a city with a declining population. The report described the Dayton Public School board as in various stages of disarray. Fordham’s own Terry Ryan was quoted as questioning whether Dayton Public Schools’ board can effectively govern a school district in a city that faces profound challenges, including poverty, diminishing financial resources, a weakened business community, and a collapsed housing infrastructure. “I think it’s fair to ask, Can any elected school board deal with the challenges of a place like Dayton?”

School Board Case Studies
U.S. Chamber of Commerce, Institute for a Competitive Workforce
May 2012

The U.S. Department of Education recently granted Ohio relief from No Child Left Behind’s (NCLB) most ponderous mandates. (Note, while the USDOE has approved this waiver the Ohio General Assembly has not yet passed the necessary legislation to make this all real). To receive relief from NCLB, Ohio was required to present a school accountability plan that would put its 1.75 million students on a college- and career-ready path. Ohio’s NCLB waiver promises a revamped accountability system based on three indicators of school quality: (1) student achievement, (2) student growth, and (3) achievement gap closure. The three indicator scores (reported as percentages) are summed and averaged—each given equal weight—to determine a school’s overall performance.[1]

The proposed system’s third indicator, gap closure, is a newly-conceived measure of how well nationally-defined student subgroups (e.g., racial, economically disadvantaged, special education, English language learners) perform on standardized tests compared to a state-designated baseline test score—an annual measureable objective (AMO). All school buildings have at least one student subgroup; however, schools are only accountable for subgroup scores if they have 30 or more students in any of the nine NCLB-defined subgroups.[2]

To gauge how well schools would perform under the proposed accountability system, the Ohio Department of Education (ODE) simulated schools’ performance using 2010-11 report card data. ODE’s simulated results, however, put into question the validity of their gap closure indicator. .

Here’s why. Consider the distribution of Ohio school buildings’ overall rating (Figure 1). The vertical axis indicates the number of school buildings by rating received, and the horizontal axis shows the rating scale, which is expressed as a percentage. We observe that most school ratings fall within a relatively narrow band between 70 and 90 percent, somewhat normally distributed, though with a leftward skew (mean = 74 percent, standard deviation = 16.9).

Figure 1: Overall school building ratings relatively evenly distributed around mean. Distribution of overall school building ratings, ODE simulated results using 2010-11 data.

Source: Ohio Department of Education and author’s calculations. Note:  A higher percentage for a building’s rating—the horizontal axes in Figures 1 and 2—correspond to a higher grade. This is equivalent to how student grades are calculated (e.g., “A” ≡ 90 to 100 percent). Overall school building rating is comprised of three indicators (1) student achievement, (2) student growth, and (3) gap closure—equally weighted.

Now consider how school buildings are distributed according to Ohio’s proposed gap closure indicator (Figure 2). Again, the vertical axis indicates the number of school buildings, while the horizontal axis indicates a school’s gap closure rating. We notice a very different distribution of schools’ gap closure ratings compared to schools’ overall ratings. Gap closure ratings are nearly evenly dispersed across the entire rating scale (mean = 64 percent, standard deviation = 33.5). Moreover, we observe a large number of schools falling in the extreme margins of the distribution; for example, 890 out of 3,275 buildings received a 100 percent rating while 320 received 25 percent rating or less.

Figure 2: More than one in three schools rated at extreme margins (indicated in bright red: 100 percent or under 25 percent) for gap closure indicator. Distribution of gap closure rating by building, ODE simulated results using 2010-11 data.

Source: Ohio Department of Education and author’s calculations. Note: Buildings without reported data were removed from calculation.

The distribution of gap closure ratings is an anomaly. Why don’t we see a more balanced, normally-distributed dispersion of school ratings, similar to what the overall ratings show—with schools gravitating towards the mean? Moreover, should we conclude that the 890 schools that received a 100 percent rating are marvelously narrowing achievement gaps, while the 320 buildings that received less than 25 percent are miserably failing?

These questions warrant a closer examination of the schools at the extremes. Perhaps we’ll find that the top-performing schools actually only have few or only one subgroup to educate, while those at the bottom of the distribution have to educate many students across many subgroups. 

A preliminary scan of schools supports the hypothesis. Take Midway Elementary School, a rural all-White school in Madison County: it received a 100 percent gap closure rating, because it met the test score benchmark for one subgroup—White students. Meanwhile, the Charles Mooney Elementary School in Cleveland received a 0 percent gap closure rating, as it did not meet the state standards for any of its five subgroups. 

Narrowing achievement gaps for disadvantaged subgroups is a legitimate educational objective, and the U.S. Department of Education is right to require states to include gap closure in annual school and district report cards. But school ratings should also reflect effort. If some schools do in fact receive 33 percent of its overall school rating points virtually free—simply because they have few subgroups—ODE should consider adjusting its gap closure rating formula.[3] Perhaps ODE could upwardly adjust the rating of high-subgroup schools based on their number of racial minority or special education students. This would be tantamount to a degree of difficulty adjustment. (Think figure skating scores: missing a triple axel is punished less than missing a single axel.) Another alternative may be to reduce the weight of the gap closure indicator from 33 percent for single or low-subgroup school buildings. These adjustments would ensure that low-subgroup schools are not unfairly rewarded and high-subgroup schools are not being excessively punished in their overall school building ratings.

In addition to the policy and advocacy work that we do at the Thomas B. Fordham Institute, our sister organization the Thomas B. Fordham Foundation sponsors eight charter schools in Ohio. In August Fordham will sponsor three new start-ups (one each in Dayton, Columbus and Cleveland). Columbus Collegiate Academy (CCA) opened in 2008, and it has now launched the newly-formed United Schools Network, a nonprofit charter management organization (CMO). United Schools Network will consolidate the operations of CCA and launch the new 6-8 Columbus Collegiate Academy- West Campus.

To learn more about all this we sat down with CCA founder Andrew Boy to hear first-hand what he hopes to achieve through the United Schools Network. 

Q. Why did you decide to form the United Schools Network (USN)?

A. While launching a high-performing, high-need, school in Columbus is challenging and satisfying, we want to do more. We recognize that we have a unique opportunity to do so. If CCA can create excellence in our flagship school, then there is no reason we cannot similarly create excellent schools in other areas of Columbus and in other parts of the Midwest. It is in pursuit of this goal that we have created an organization to support the growth and replication of schools based on the United Schools Network model. 

Q.  What will be the main function of USN?

A.  A “home office,” which will house the Chief Executive and other key senior leaders of the organization, will centrally direct USN operations. At its core, the “home office” will be charged with the following responsibilities:

• Providing resources to USN schools: Teacher recruitment support; external fundraising; alumni services; marketing and branding.
• Providing services to USN schools: Vendor contract administration; financial management and budgeting; human resources management; professional development and leadership development.
• Defining the core framework of a USN school: Curriculum development, assessment determination and analysis; school culture planning and execution.
• Providing accountability to USN schools: Student performance benchmarking; leader selection; leader evaluations and professional development plans; stakeholder surveys, annual reporting; school improvement initiatives.
• Determining the strategy of USN schools: New school development; strategic partnership creation and maintenance; central board governance training and support.

USN is designed to be a strong home office that will have strict control over many school design elements and school functions that are managed primarily at school sites in other CMO structures. We believe that by clearly defining key elements of the USN school design and of the manner in which USN schools will operate, we can reduce the variability between schools and ensure the high-quality implementation of the USN model and brand in each USN building. We believe that within this clearly defined structure, highly-talented and capable school leaders will be able innovate and improve upon the extant model to ensure the highest level of performance for our schools. 

Q. When deciding what USN should look like and how it should operate, did you study other successful CMO’s around the country?

A. Yes, we most closely align with Uncommon Schools. However, we used research from several national reports to compile all of the best practices from those who have come before us. 

Q. Where do you get your teachers, and what does the recruitment process look like?

A. We cast a very wide net to find the best and the brightest teachers. We have received more than 500 applications for four available positions this year. Many of our teachers are Ohio natives that have left the state for one or another reason and are now looking to return. Our human capital search begins with the job post. It is vitally important that we get exposure to the right talent and that these folks are able to locate our job posts easily. The goal is to make USN schools the spot for educators to apply for those already living in the Columbus area and for those looking to return to Ohio. Emphasis will be placed on candidates from local and national organizations, such as Teach For America, that have a demonstrated track record of success. After posting positions, we follow a very specific process.

Q. Will USN set up a leadership pipeline, and how are you going to provide training?

A. We are considering several different options. Some include an internal training program and others include a close partnership with Building Excellent Schools that will support the development of our rising leaders.

Q. What are your future growth plans for USN?

A. Over the next five years, USN will work aggressively to deliver the value and opportunity presented by the CCA educational model to over 1,000 additional students by founding two additional K-5 “No-Excuses” charter schools. We also plan to evaluate and identify other “opportunity” locations for replication throughout the Midwest. 

McKinsey & Company research consultants describe the potential of social impact bonds (SIBs) as an innovative financing tool for scaling social programs. An SIB is a “bond” in the sense that private investors supply capital to realize financial return. An SIB is “social” in that the investment capital is used to “scale up” social service programs to increase their reach and social impact.

SIBs differ from traditional social sector financing in two ways: First, SIBs are vehicles to grow proven intervention programs. Since governments tend to fund remediation programs (e.g., incarceration) and private philanthropy gravitates toward funding start-ups or capital projects, operating funds for scaling intervention programs remains scarce. SIBs would fill this financing void.

Second, unlike traditional social sector funding, SIBs involve a financier and private investors—which could range from pension funds to mom and pop investors. Traditionally, social sector funding has been one-directional, with a government or philanthropic entity directly financing a nonprofit. Under the SIB framework, additional actors are involved: a financier sells “bonds” to investors who fund the social service provider. If the service provider meets its service performance objectives, a governmental entity reimburses the financier who, in turn, returns the investment plus interest to the investors. The involvement of additional stakeholders increases the flow of funds, but also increases the complexity—and cost—of financing social programs.

The United Kingdom has already pioneered the use of SIBs to scale up services for disadvantaged youth. And last summer, the State of Massachusetts began piloting SIBs to finance homeless and juvenile delinquency intervention programs. Because these programs are new, McKinsey wasn’t able to measure the effectiveness of SIBs in improving social outcomes; however, they do provide evidence from pro forma analyses that indicate, in the long-run, SIBs could provide net benefits to both taxpayers and society.

Could educational institutions benefit from SIBs? As McKinsey portrays it, public schools don’t appear to be eligible candidates for SIB-based financing, for they are governmental institutions with the authority to issue public debt. SIBs, however, may be a useful means of financing nonprofit educational programs—perhaps even charter schools. SIBs could increase private investment to enable the most effective charter school organizations to scale their operations; for example, an organization like KIPP could back SIBs that enable it to open and operate more schools across the country.

Although the Center for American Progress considers SIBs too “risky” for charter school financing, the idea merits further consideration, especially for charter school operators or authorizers who have a proven track-record of success. An SIB backed by an effective charter (triple-A rated, in business terms) benefits the charter operator who seeks greater scale and social impact, while also offering private investors an opportunity for monetary gain in a lower-risk. As a concrete first step, the friends of school choice should follow McKinsey’s analyses and conduct a pro forma cost-benefit analysis of charter school SIBs to establish whether SIBs present a sustainable financial model for proven charter school operators.    

From Potential to Action: Bringing Social Impact Bonds to the US
McKinsey & Company
Laura Callanan, Jonathan Law, and Lenny Mendonca
May 2012

Over the past few years, much has been made of students’ “time in learning”—whether more time on task while in class, extended school days, or more days in school each year. Yet little attention has been paid to chronic absenteeism—missing more than 10 percent of a year’s school days—mainly because few states track these data. Instead, most states report average daily attendance, which can mask high levels of chronic absenteeism. This exploratory study parses attendance data from six states (FL, GA, MD, NE, OR, and RI) and finds that, on average, 14 percent of students are chronically absent. To put this in perspective, if extrapolated to the national student population, the U.S would have more chronically absent students than charter school students.

In addition, this report offers information about who is most likely to miss class. The researchers found that low-income students are most likely to miss a lot of school, as are the youngest and oldest students. High-poverty urban areas see up to a third of their students miss 10 percent or more of their courses each year. Absenteeism is also a problem in rural poor locations. But neither gender nor ethnicity appears to play a role in chronic absenteeism.

In Ohio, as discussed in Building a Grad Nation, we need to do a much better job at tracking and solving the problem of chronic absenteeism. Although there are a couple of programs that are implemented at individual schools, Ohio has no state-wide absentee-reduction program. One school that has initiated an absentee-reduction program is Hamilton Township High School, which started pairing administrators with struggling students to reduce the risk of absenteeism and possibly dropout. In a more controversial policy, Dohn Community High School in Cincinnati paid seniors $25 and underclassmen $10 per week to arrive to school on time, behave, and do work. More examples of what other states are doing to combat chronic absenteeism can be found here. 

The Importance of Being in School: A Report on Absenteeism in the Nation’s Public Schools
Robert Balfanz and Vaughan Byrnes
Johns Hopkins University, Center for Social Organization of Schools
May 2012

The U.S. Chamber of Commerce’s Institute for a Competitive Workforce (ICW) examines school boards in 13 cities to see how the business community has played a role in school governance. The cities profiled were Atlanta, Austin, Bismarck, ND, Denver, Detroit, Duval County, FL, Laramie, WY, Long Beach, CA, Los Angeles, Newark, NJ, Pittsburgh, Seattle and Fordham’s hometown of Dayton, Ohio.

School boards impact education big time. They are involved in everything from setting policies on teacher evaluation systems, to hiring district leadership, to negotiating collective bargaining agreements.

The Chamber report analyzed the challenges and successes of school boards in cities with challenging social, political and fiscal issues. The authors studied cities that are in various stages of growth, or in some cases, decline.

Dayton, the only Ohio city profiled, is as a city with a declining population. The report described the Dayton Public School board as in various stages of disarray. Fordham’s own Terry Ryan was quoted as questioning whether Dayton Public Schools’ board can effectively govern a school district in a city that faces profound challenges, including poverty, diminishing financial resources, a weakened business community, and a collapsed housing infrastructure. “I think it’s fair to ask, Can any elected school board deal with the challenges of a place like Dayton?”

School Board Case Studies
U.S. Chamber of Commerce, Institute for a Competitive Workforce
May 2012