The Promise of Social Impact Bonds

June 26, 2012
Excepted from an article by Tina Rosenberg in the June 20, 2012 Opinion Pages in the New York Times: When a government needs to invest in an expensive capital project — a new sewer system, bridge or highway — it issues bonds. Bonds raise upfront money from private sector investors,…

Excepted from an article by Tina Rosenberg in the June 20, 2012 Opinion Pages in the New York Times:
When a government needs to invest in an expensive capital project — a new sewer system, bridge or highway — it issues bonds. Bonds raise upfront money from private sector investors, who are then paid back with interest from the tolls or charges the project will generate. Until now, no one ever issued a bond to invest in people. Many individuals who are chronically homeless and affected by mental illness use the prison system for housing, the emergency room for basic medical care, and the courts as a support system. These our most vulnerable and at-risk neighbors are the highest utilizers of the highest cost care. This lifestyle is more than a tragedy for them; it’s a tragedy for taxpayers. Keeping these neighbors alive —never mind helping them to recover — is hugely expensive. Governments would prefer to prevent people from cycling over and over through prisons, courts, homeless shelters and hospital emergency rooms. And they know that there are interventions that are proven to help and to save money. But these programs are expensive enough that cash-strapped governments usually can’t begin them. Cities are so stretched — in part from providing acute care for the high utilizers — that they have nothing left over for prevention.

A brand-new financial instrument may provide a way out of this dilemma, it’s same as any other financial instrument for example CBA. Social impact bonds are the latest illustration of two new and welcome trends in social services. One is measuring outcomes, not outputs. The number of people counseled is an example of an output. That may or may not be a marker of success, but it usually becomes the benchmark because it’s easy to count. Measuring outcomes, such as less recidivism, is, of course, the test of whether a program is working, but it is often very hard to do. Sometimes outcomes aren’t visible for many years. And it can be hard to know what made the difference without a randomized controlled trial — far too expensive to be realistic. The other trend is paying only for success: if the program doesn’t work, the taxpayers can tear up the bill.

Massachusetts will be the first place in the United States to try one. The state is hoping to sign contracts this summer to back $50 million in bonds for two projects:one to help people coming out of the juvenile justice system make the transition to adult life, and another to house the chronically homeless. Jay Gonzalez, Massachusetts’ secretary of administration and finance, said that the expense of paying for shelters and prisons now leaves nothing left over. “We’re cutting the shelter budgets, so it’s even harder to find resources to invest in preventive solutions before we can realize the savings,” he said. “We have a new fiscal reality in government,” said Gonzalez. “We have to find new and innovative ways to get better results at less cost. We don’t have a choice at this point.”

Other states as well are exploring the bonds, or variations on them. New York City has been working for more than a year on developing a bond to help people coming out of the juvenile justice system stay crime-free. Tracy Palandjian, the chief executive of Social Finance US, says the organization has talked to “well over 30” jurisdictions interested in social impact bonds. And countries like Australia, Canada and Israel are looking at them, too. Most of the pilots focus on cutting crime and homelessness — two issues that have interventions we know work, and we know save money. In addition, they offer outcomes that can be measured in the medium term — important, because these determine whether investors get paid. A prison project was chosen for the pilot, in fact, because it was relatively easy to measure recidivism. Peterborough has a large number of people serving short sentences, and when they get out, they tend to stay in the community. “We wanted to fund something with a clearly defined outcome,” said Alisa Helbitz, the director of research and communications at Social Finance in London. “You can’t measure ‘well-being.’ ”

There are various ways social impact bonds could create a more intelligent approach to social programs. Typical social programs usually end up focusing on the easy cases — so their success rates stay high. Social impact bonds have the reverse effect: they provide an incentive to help the really hardest cases. Social impact bonds could also make service work more rational. Like politicians, nongovernmental organizations are constantly fundraising. Financial uncertainty can rob them of the power to plan more than a few months ahead. Social impact bonds could give them the up-front money they need to be effective, and they can use the money however they think appropriate to meet their targets.

Bill Pinakiewicz, vice president of the Eastern region of the Nonprofit Finance Fund says, “Social impact bonds established that there is paydaynow value to positive outcomes being delivered to families, individuals, and communities in need. It creates a dollar value that can be used to pay back investors. They have real economic value and attract financing — like breakfast cereal and software.”

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