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Social Impact Bonds emerge

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Social programs have always had a number of problems working against their success. Efforts to finance healthcare, education, and prison reform often lack sufficient funds, and the bureaucratic red tape that can interfere with—if not completely stalemate a program’s effectiveness—are the most common walls such programs often run into.

A new method of financing these programs that could change all that by streamlining funds and cutting back on the bureaucracy has been initiated internationally. This new financing method involves using Social Impact Bonds (SIBs).

SIBs are not the same as typical investment bonds. Under SIBs, a private investor, (such as the United Way) signs an agreement with the government to privately finance a social intervention program, (for example, an educational program to reduce the number of high school dropouts). After an agreed upon amount of time, usually in terms of multiple years, if the program reaches a stated goal, the government would then pay a return on the private investor’s contribution. The program is structured so that it has agreed upon goals as well as a timetable that measures the success in reaching those goals.

However, if the goals are not reached, then the funding entity loses the investment, and the government pays nothing. For many large corporations, such as the Rockefeller Foundation, or the investment bank, Goldman Sachs, Social Impact Bonds provide them with a way to do philanthropic work in the community, as well as pay attention to their bottom line.

“Pay For Success Bonds”

The major emphasis is on achievable program goals. In the United States, this approach is often referred to as ‘Pay for Success Bonds.’ The current method of financing social programs is that usually they are funded by a government group after a lengthy approval process by an appropriations committee. However, even then, funding may only be approved for one to two years. This is usually an insufficient amount of time and money needed for more than remedial programs which often address challenging social issues after the fact. This is equivalent to an emergency room visit after the patient is sick, rather than preventative healthcare for the homeless or low-income patients or reform programs for convicts after they have been released from jail to prevent reoffending.

These programs may not result in health improvement or a reduction in crime, because there may not be sufficient time or staff to check target goals. Also, government funds sometimes continue to be paid into an unsuccessful program because lack of funding prevents hiring adequate staffing to review progress or measurable goals are not defined.

The first SIBs pilot program was pioneered in Petersborough, England, in 2010. Using financing from a London-based non-profit organization called Social Finance; the organization raised $7.9 million to provide services to prevent 3,000 short-sentence male prisoners from reoffending over a six-year period. The goal was to prevent a relapse back into criminal or anti-social behavior. The program assisted prisoners with job training, health benefits and housing.

Economic advisor to presidents Obama and Clinton, Jeffrey Leibman, Ph.D., of the Center for American Progress (CAP), published a report citing how successful, innovative programs can often be unsuccessful at getting the attention of policymakers and funding. Prior to the new SIB, 60 percent of such U.K. prisoners relapsed within one year. (According to a similar report from 2011, the California Department of Corrections noted that 65.1 percent of those released from incarceration return within three years).

The British government will make payments to Social Finance only if the recidivism rate falls by at least 7.5 percent compared to groups in similar prisons. These payments will only come after data has been collected showing that goals have been met.   This could result in full payments not being made due to all finalized data being collected and reviewed. Social Finance estimates that if the program is successful, ultimately it could result in decreased incarceration costs across the United Kingdom.

The SIBs method of financing has gained international approval, and there are long-term plans of using this approach to finance various other types of social intervention programs.

Since the beginning of the program, the U.K has received enquiries from the United States, Canada, Australia and Israel among others on how to structure similar models in their respective countries to address prison reform, healthcare and education.

Obama proposes $10 Million for SIB’s

In 2011, President Barack Obama proposed $10 million toward financing SIBs for the 2012 federal budget. The funding would have been spread across seven program areas within the departments of Education, Justice, and Labor as well as the Social Security Administration and the Corporation for National and Community Service.

In December 2012, then State Sen. Curren Price, of the 26th Senate District, (now a Los Angeles Councilman), introduced SB9, legislation to create the California Office of Social Innovation and Entrepreneurship as a focal point for creating ideas that would innovatively use SIBs for financing solutions for the state’s social problems. He also proposed SB 431, Social Economic Pod Program, (which is still under consideration as of February 2014). This legislation would encourage the use of social innovation financing within beleaguered areas.

In June 2013, Price headed a joint informational hearing on exploring whether SIBs could be used for many of Los Angeles city’s under-financed social programs. This would include the possible creation of a pilot program in his council District 9 to, “use SIB for an influx of capital that doesn’t rely on our general fund.”

According to Price, “We have been dormant in generating solutions that would reduce homelessness, improve delivery of critical healthcare, and reform our criminal justice system, and inaction has only exacerbated these problems. It’s essential that we create private-public partnerships to leverage our limited resources.”

Annie Donovan of the White House Office of Social Innovation and Civic Participation noted that for the 2014 federal fiscal year, a $300 million incentive fund had been proposed to be held in the Department of Treasury. It would implement Pay for Success programs with financial partners and would offer direct grants for successful money-saving strategies.

Liebman’s report also states that “potentially high-value programs never have the opportunity to prove themselves through a rigorous evaluation, because they cannot cobble together the resources to replicate their initial model, or fail to attract the support of those who control the government’s purse strings.” He cites as an example, The Maternal, Infant, and Early Childhood Home Visiting Program which provided in home visits to pregnant women and low income families. Although the program was successful as a trial, it lacked the funding to be implemented. It was enacted 33 years later in 2010 under the Affordable Care Act.

The first use of social impact bonds in the United States was in New York City in August 2012 in a program targeting recidivism among the 16-18 year old population at Riker’s Island jail. An investment of $9.6 million was made by Goldman Sachs, the international investment banking firm. The investment finances therapy, job training and other services over a four-year period to reduce recidivism, with the goal of improving social decision-making, problem solving and self-control skills management. Since Social Impact Bonds are structured as a lon-term program, it will be some time before it can be determined if recidivism is reduced.

In June of 2013, the first Pay for Success model designed to finance early childhood education in the United States was announced. It was the result of a combined investment of $7 million by Goldman Sachs, United Way of Utah, and investor J. B. Pritzker’s Early Childhood Accelerator Program.

Benefit to ‘at risk’ children

Designed to aid at-risk preschool children, the program uses a structured curriculum to prepare children for kindergarten, and to decrease the use of special education and remedial services in elementary school. Ideally, this will result in children who are better prepared to learn, as well as a long-term cost savings for the state and the school district in Utah. The long-term benefits would be a decrease in crime, teen pregnancy, delinquency and substance abuse.

In Fresno, 20 percent of the population is affected by asthma, compared to the 8 percent national average. This prompted the first model of a Pay for Success social intervention to finance a health program targeting asthma prevention. Anne Stuhldreher of the California Endowment stated that funding for this new approach puts the emphasis on prevention, rather than on after-the-fact disease care, with the goal being a reduction in asthma attacks by using home inspection to educate families about changing air filters, what cleaning products to use, the proper use of inhalers, and information on how diet could reduce emergency-room hospital visits for children, who in the past made frequent ER visits for treatment.

The goal was set to achieve a 30-percent reduction in ER visits, and a 50-percent reduction in hospital stays over an 18-month period. This would ultimately translate into healthier children, and over time, reduce Medicaid/Medi-Cal spending.

Pay for Success or Social Impact Bonds could potentially serve as a positive development for a range of issues. Programs that provide the chronically homeless with permanent supportive housing could decrease the use of acute medical care, temporary shelters and jails. This would result in savings for the government agencies concerned with Medicaid/Medic-Cal, corrections, and housing.

Funding programs aimed at reducing reoffending by youth and adults this way could result in government savings for the correctional and probation departments.

This new approach gives private investors who want to contribute to the community both the chance to practice philanthropy and still have an opportunity to add to their company’s bottom line.

‘Rethinking’ business model

According to Leibman’s report however, SIBs are not an answer for all social problems. There are a number of challenges to this new way of implementing social interventions. The government and social intervention programs have to re-think how they do business. New methods of writing contracts for long-term agreements with private fund providers would have to be implemented. Neutral review boards will also have to be created to monitor whether program goals are met, as well as to ensure that payments are made when they are.

There are also concerns from potential investors. Some fear that if a program is successful, payments on their investment could be hampered, if policymakers change after an election.

Leibman, said that in response to this concern, In July 2012, Massachusetts passed legislation guaranteeing payment to investors upon successful goal completion up to $50 million, once programs are in place, regardless of state administration changes.

Many investors also want a guarantee that once they have invested in a social intervention program, it will be run effectively.

In Leibman’s CAP report, according to the U.K. model, suggestions were made that private investors could have an influence on the way the project is operated since they are taking the majority of the risk.  Some suggested ways include buying a share in the provider organization and/or taking a seat on the board. They could also attach conditions to an investment, such as the right to take control or end a project that is under-performing. Also, engaging an intermediary to oversee provider performance during the contract could be considered.

Initial feedback for Pay for Success, or Social Impact Bond programs, has been positive. But even the first model in the U.K. won’t have its first official data until the end of 2014. This new concept for financing many of the social intervention programs badly in need of funds could assist (although not replace) the government funding at the federal, state and local levels that these programs have relied upon for years and give health, education and other social interventions a chance to achieve higher goals only hoped for in the past.

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