The voices of Urban Institute's researchers and staff
June 20, 2016

Illinois’s budget crisis may jeopardize innovative financing efforts

The political and fiscal strife in Illinois has long made the Land of Lincoln the butt of jokes across the country. But as the state heads toward a second year without a state budget and funding for school districts hangs in the balance, the situation has become far from a laughing matter.

The budget impasse has significant implications for school districts across the state, particularly poorer districts that lack the cash reserves or local property tax revenue to keep them afloat. Chicago Public Schools (CPS) is one such district. As schools across the city prepare to let out for the summer, there are real concerns that doors may not reopen in the fall, which would have a devastating impact on the nearly 400,000 CPS students and their families. 

This budget crisis stems from ongoing political discord while the state grapples with a multibillion-dollar deficit. In an environment with such strain on public resources, cities and states need innovative financing mechanisms that leverage capital sources beyond the public sector. Unfortunately, the current budget impasse may undermine both existing and future efforts to secure support from private and philanthropic funders.

Chicago has already begun to leverage innovative financing mechanisms. In 2014, the city launched a pay for success (PFS) project to expand preschool for low-income students.

PFS is a financing mechanism that provides access to up-front capital and ties repayment for service delivery to the achievement of measurable outcomes. PFS-funded programs undergo independent evaluations to determine if the program achieved the desired outcomes, and investors are repaid only if the program meets those targets.

In the Chicago PFS project, the city secured $16.9 million in up-front capital from private and philanthropic funders—including Goldman Sachs, Northern Trust, and the J. B. and M. K. Pritzker Family Foundation—to expand CPS’s Child Parent Center program, a preschool model that uses collaborative teams to align and coordinate education and services for students and their families. Through PFS, CPS expanded the program to reach an additional 2,600 children in high-poverty neighborhoods.

The project includes an independent evaluation to determine the program’s impact on student outcomes. CPS and the City of Chicago will repay investors up to $34 million over 17 years if the project is successful. Initial evaluation results released last month are promising.

However, if the state cannot pass a budget, the PFS project and associated evaluation could be interrupted, with implications for student outcomes and the rigor of the evaluation results. The evaluations built into PFS projects have an impact beyond the scope of individual projects; they contribute to the evidence base on service delivery models. Findings from these studies can help policymakers make decisions based on information about what works and what doesn’t, maximizing the efficiency of policies and investments going forward.

PFS is one of many tools that can leverage resources outside the public sector—it is not a panacea to the city and state’s complex fiscal challenges. But no matter the size of PFS’s role in easing the squeeze on the public books, the inhospitable political environment jeopardizing this PFS project could make it harder for the city to attract investment and innovation in the future.

Like other states and cities dealing with resource constraints, Illinois and its municipalities may increasingly need to leverage private and philanthropic resources. Cultivating a political landscape conducive to innovative, cross-sector partnerships is critical. The prolonged dissonance and impending disruption to Chicago schools and the state’s only PFS project could put off private and philanthropic investors, potentially sacrificing dollars Illinois desperately needs.

Demonstrators, protesting the state of Illinois budget stalemate, rally in the Loop before marching to the Chicago Board of Trade Building where they blocked all of the entrances to the building on November 2, 2015 in Chicago, Illinois. The Moral Mondays demonstrators were calling for a tax on stock and futures trading to help fund social programs. Photo by Scott Olson/Getty Images

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