Social-impact bonds a way to tackle homelessness? | Providence Business News

By Patrick Anderson 
PBN Staff Writer

Posted 3/24/14

Jim Ryczek, executive director of the Rhode Island Coalition for the Homeless, estimates that $20 million invested in preventing homelessness could put a large enough dent in the problem to save the state money in the long term.

He is also keenly aware that finding that kind of spending increase in Rhode Island’s annual budget this year, or next, is a long shot at best.

“We are up against a big problem that needs funding to solve it, and a yearly legislative funding schedule that is hard to crack in terms of investing for a long-term intervention,” Ryczek said.

So Ryczek supports using a technique from the financial sector, called social-impact bonds, to tap private investment for the capital to make structural progress on big, public challenges.

Also known as “pay-for-success” or “social-innovation financing,” the model was first employed in the United Kingdom about four years ago, but has quickly caught on in the United States.

This past winter, Massachusetts launched the largest social-impact-bond project in the country, a $27 million investment led by New York firm Goldman Sachs to combat criminal recidivism among at-risk, urban young men.

This year, for the first time, a formal move is afoot in Rhode Island to start a social-impact-bond program.

A bill sponsored by Sen. Joshua Miller, D-Cranston, would establish a five-year social-impact-bond pilot program along with a committee to study it and recommend if and how a permanent program would work.

“I thought getting private participation in solutions to ongoing initiatives was an interesting concept,” Miller said. “I know there is some concern you are getting private involvement in what have been traditionally public issues, but there have been efforts where the public hasn’t been interested in diving in because there was too much risk for the government. And I think it will always be that way.”

Of course, while the concept of attracting private money to public problems is attractive, hammering out the details of a program that works for all sides can be complicated.

Miller’s bill authorizes the state to borrow a maximum of $5 million in each of the next five fiscal years on social-impact bonds.

But the bill leaves almost all of the details of how the program would work up to the executive branch, which would run it.

In a typical social-impact-bond program, a group of private investors funds a program run by or in collaboration with a nonprofit to tackle a social challenge with significant public-sector expense.

If the intervention achieves an agreed upon set of goals that create long-term savings for taxpayers, the investors are repaid the principal and a prearranged return out of those savings by the government. If it fails, the investors will lose at least some of what they put in.

Success of the program will be judged on how many days those reached by Roca spend in jail, and, as a result, end up costing the state in prison expenses.

The state estimates a 40 percent reduction in incarceration would save enough to break even with the cost of providing the new services and a 70 percent reduction would save an additional $23 million.

Goldman Sachs is putting up $9 million of the $18 million in private capital for the Roca project and is joined by five nonprofits, which will make $3 million in loans and $6 million in grants.

If Roca hits its 40 percent reduction target, Goldman will be repaid its principal plus 5 percent interest, with The Kresge Foundation and Living Cities getting 2 percent interest.

If Roca hits 70 percent, “success payments” will go as high as $27 million, offset partially by federal grants.

The financing is being arranged by Third Sector Capital Partners, a nonprofit intermediary, and Sibalytics LLC will rule on the project’s effectiveness.

Reducing incarceration rates, also the target of New York City’s social-impact-bond program, is just one of the problems that can be tackled using the financing technique.

With homelessness, Ryczek said private financing could be used to build housing and provide support services to reduce the cost of shelters, policing and medical costs.

Other programs have looked at issues ranging from education to asthma rates, public intoxication and emergency-room visits.

Diane Lynch, chairwoman of the board of Social Enterprise Greenhouse in Providence, said one of the biggest challenges for some projects that would use social-enterprise bonds is finding control groups to measure performance against.

But Lynch sees social-impact bonds as a potential opportunity for Rhode Island to explore.

“It’s the right first step to establish a pilot program and study committee,” Lynch said. •