Social impact bonds bring government, investors together to solve societal problems (Denver Post)

By Alicia Caldwell

It is foolhardy to believe government will ever have enough resources to fix society's problems.

Just think about the magnitude of the work: Getting the homeless off the streets, keeping poor, at-risk babies out of intensive care units, helping ex-convicts create productive lives instead of heading back to prison.

This short list barely scratches the surface of the important causes and serious problems out there, and government doesn't have near enough in the way of cash or even public backing to make a sizeable dent in them.

The gap, however, has the potential to be narrowed by an innovative and complex tool called social impact bonds.

Also called "pay for performance," the idea is getting traction with Colorado government officials, non-profits and lawmakers moving to create legislation to help get such deals off the ground.

The basic idea is to harness markets to take on these deep-seated problems in a way that has created a new economy, one that "trades in social outcomes," according to authors of a 2013 Harvard Business Review article.

"It's an exciting and effective strategy," said state Sen. Michael Johnston, who unsuccessfully ran a bill last year that would have created a vehicle for governments to enter into "pay for success" contracts.

Johnston, a Denver Democrat, says he'll bring back the measure this year in a retooled form. He sees social impact bonds being used for prenatal services, home visitation for families dealing with mental illness, and recidivism prevention.

So, what are social impact bonds?

It's helpful to think of them as a three-way deal between government, investors and service providers, often non-profit do-gooders. Investors provide the up-front money for a program run by a non-profit, and government pays off investors, depending on whether the program succeeds.

Clearly, such a mechanism would benefit social welfare organizations that engage in the important work of making sure kids get off to a healthy start, for instance. They get a reliable stream of money and can focus less on fundraising and more on services.

Achieving agreed-upon goals is important to them not just because they care about their missions, but because it could determine whether they get another social impact bond.

Yet, the upside for government is clear, too. Instead of pouring money into dealing with crises caused by intractable social problems, they focus on preventative efforts and are obligated to pay for services — including a rate of return — only if agreed-upon goals are achieved.

The money comes from the savings government realizes when ex-cons don't go back to prison, for instance, or low-income kids are born healthy and need less publicly financed health care.

Investors are the third side of this triangle. They kick in upfront money and take the risk, but they also get their principal back and make what is a typically modest rate of return if the service providers succeed. They also get the satisfaction of knowing they helped accomplish a societal good.

Colorado's U.S. Sen. Michael Bennet is sponsoring a bill to establish a federal pool of money to encourage social impact bonds. He told The Denver Post recently the funding tool might someday "revolutionize the way we think about government."

In the next session of Congress, Bennet plans to bring back his bill, co-sponsored by Utah's Sen. Orrin Hatch, to see if lawmakers will go along with the idea of creating a $300 million pool of money for these efforts.

"That fund would allow local governments and service providers who say they've got a better way of fixing the recidivism problem, fixing a dropout problem, fixing, you know ... whatever it is, to be able to apply for the designation and know the money is available," Bennet told The Post at an editorial board meeting several months ago.

"But they don't get paid unless they succeed at meeting the metrics that are agreed upon," Bennet said.

Helping first-time mothers

Colorado is, in fact, an incubator for this cutting-edge idea. Roxane White, who has just taken over the Nurse-Family Partnership (NFP), is planning to use social impact bonds to expand the reach of her group.

NFP is a national organization based in Denver and White, formerly chief of staff to Gov. John Hickenlooper, is planning to do social impact bond deals in two states — New York and South Carolina — in the next three to five months.

Her non-profit engages registered nurses to visit first-time mothers in poverty and give them advice intended to help them establish a stable and positive home for the children they are bringing into the world.

White is buoyant about the potential of bonds as a source of funding so that groups such as hers are "not always begging for money."

NFP is a particularly good candidate for social impact bonds because it has a long history of very well-documented results. The organization can show potential investors 37 years of evidence-based research.

That is an unusually long stretch of time, and the quality of research on NFP efforts isn't typical for many social service organizations.

Two of the outcomes NFP has achieved are a 24 percent reduction in tobacco smoked by pregnant women, important to improving the health of their babies, and an 18 percent dip in pre-term births.

Their children, too, see benefits from the visits. There are significantly fewer emergency room visits. Less child abuse. Diminished chances of language delay. A reduction in youth crimes and arrests.

One doesn't have to stretch to imagine how such outcomes could save money in the realms of health care, social services, education and the judicial system.

Meanwhile, Denver's city government is also crafting an effort to use social impact bonds to go after the problem of the hard-core, chronically homeless.

Denver is pulling together a partnership of private and institutional investors, foundations and social welfare groups to work on the issue.

"Denver, as well as other cities, have struggled for a long time to fund preventative services," said Cary Kennedy, Denver's deputy mayor. "Decade after decade, governments spend our money on crisis services because we have to."

The idea is that service providers will receive money from investors to take on efforts that alleviate homelessness: mental health services, housing and other interventions.

If this works as envisioned, fewer of these folks will be arrested and end up in emergency rooms or in jail. The city spends $11 million a year to deal with about 300 chronically homeless, Kennedy said.

"The jail has become their housing, and it's very expensive," Kennedy said.

Such interventions have the potential to save the city significant amounts of cash. The money saved will be used to pay back investors. The idea also includes tiering returns based on outcomes. Essentially, the better the outcomes — and the savings — the more that investors could earn.

The partners in the deal will hire an independent evaluator to judge whether the outcomes were successful.

"There are real potential earnings because there are real potential savings," Kennedy said.

Federal legislation

The other attractive feature of social impact bonds is the ability to use them to fuel a move from a smaller-scope effort to a larger one, said Colorado's U.S. Rep. Jared Polis, who also has introduced federal legislation on social impact bonds.

"The beauty of social impact bonds is that they allow for rapid scaling of these efforts," said Polis, a Boulder Democrat.

Polis, who went to the White House last week for the president's summit on early childhood education efforts along with local philanthropists David and Laura Merage, said he is hopeful there will soon be a pre-school pilot program funded by a social impact bond in a Colorado city or neighborhood.

"We are very much in the forefront of this discussion," Polis said of the multiple efforts taking place in Colorado.

Social impact bonds are new and unfamiliar to a lot of people. They are complex and often vary in the detail of how they're structured.

But they've captured the imagination of many who believe they have the power to change the way government takes on some serious social problems that have proven difficult to fix.

The concept has promise and momentum. Clearly, these are experiments worth conducting.