Why using social impact bonds to push for success is a good idea (Denver Business Journal)

Senator Michael Bennet

Like many Colorado families over the past several years, governments ­ at all levels ­ have had to tighten their belts to make ends meet. While Congress has failed to develop a comprehensive and forward-looking plan to address its deficits, some state and local governments are looking for innovative ways to balance their budgets and having important conversations about government investment.

As Ben Franklin once said, "an ounce of prevention is worth a pound of cure," yet government consistently underinvests in prevention services and instead foots the bill for costly remedial services. And too often there's no process to evaluate the effectiveness of any of these services.

In the end, taxpayers often have no idea whether they are paying for a winner or a dud, which programs deliver results, or whether service providers use resources wisely.

There's a new approach catching on across the country. From Massachusetts to South Carolina to Oregon and even right here in Colorado, government entities are beginning to use social impact bonds to help increase accountability, save taxpayer dollars, and engage creatively with the private sector to find innovative ways to provide more effective services.

The core idea is simple: pay for success. Governments will only pay for projects that deliver agreed-upon results, whether it's increasing employment at workforce centers or reducing recidivism at prisons.

Here's how it works: A government entity will enter into a contract with a provider that includes very specific metrics and results they must achieve in order to be paid. The results they promise will include better outcomes than what taxpayers are already receiving, will be cheaper than what taxpayers are paying, or both.

The service providers find financing from investors, banks, and other sources. An independent auditor monitors progress and verifies whether the project meets its goals. The key element is that service providers and investors are paid only if the auditors declare that they delivered the better outcomes they promised.

If a project succeeds, private investors recoup their investment, plus an agreed-upon rate of return. Service providers have an incentive to find more effective and efficient ways to deliver quality work. Taxpayers avoid the risk and cost of delays, poor performance, or outright failure. They are the biggest beneficiaries, served by well-run programs and services at a lower cost.

Many local governments are in the early stages of these projects. In Massachusetts, private organizations are providing behavioral and career-preparation services to juvenile offenders to reduce recidivism rates. They're helping more than 900 young men get back on their feet. Over the next seven years, an independent auditor will evaluate the work to ensure it satisfies the goals of the project. If it does, more at-risk youth will stay out of jail and become productive members of society, and Massachusetts' yearly $300 million incarceration bill will drop, making resources available for other priorities.

These new projects, including a fledgling program in Denver to reduce homelessness, inspired Republican Sen. Orrin Hatch of Utah and me to introduce a bipartisan bill to find new ways to fund these innovative partnerships. Reps. John Delaney of Maryland and Todd Young of Indiana, a Democrat and a Republican, have introduced a similar bill in the House of Representatives.

Our bill establishes a national fund to create more opportunities for states and local governments to work with the private sector to tackle pressing social and public health challenges. Whether it's job training, health care, or after-school programs, social impact bonds can spur new and smarter ways to deliver services while bringing better results with less cost and risk to taxpayers.

We set the foundation for this type of investment earlier this year when Sen. Rob Portman and I passed a bill allowing states to direct 10 percent of their funding for workforce training to enter into pay-for-success contracts.

Our long-term goal is to unleash a new wave of public-private partnerships that will improve government services and effectiveness throughout the nation, minimize the financial risk to taxpayers, and give the private sector appropriate incentives to innovate and deliver projects that benefit the entire country.

By encouraging service providers to vigorously test and scale what interventions work best, social impact bonds create a feedback loop for the delivery of services, driving further innovation in areas of persistent societal challenge.

Michael Bennet, a Democrat, represents Colorado in the U.S. Senate.