BY LYNN HUME
MAY 1, 2014 1:59pm ET
WASHINGTON — Federal lawmakers' first look at so-called social impact bonds resulted in more questions and concerns than support on Thursday.
During the first congressional hearing on this financing tool, Sen. Mark Warner, D-Va., chairman of the Senate Budget Committee's Government Performance Task Force, said social impact bonds "have some value" because they bring private investors, and therefore private discipline, into a financing scheme that is designed to finance social programs.
But other task force members, including its top Republican, Sen. Kelly Ayotte from New Hampshire, and Sen. Angus King, an Independent from Maine, had concerns, saying this kind of financing seems complex and costly.
"I have a radical idea," said King. "Instead of trying to contract out with social impact bonds, why doesn't the government just get it right?" Social impact bonds are, in essence, "a gigantic admission that the government can't do stuff," he said.
With social impact bonds (SIBs), also called Pay for Success (PFS) contracts, a state or local government typically contracts with one or more service providers to obtain social services, such as reducing obesity or the percentage of juvenile offenders who end up in prison within five years after release. The government will pay based upon the provider's meeting certain specified performance targets, such as 10% reduction in recidivism. If targets are not met, the government does not pay.
There is often a several year lag between when services are delivered and when the results can be measured and government payments are made. Private investors bridge his cap, providing capital to fund the upfront operating expenses of the service provider. Typically a nonprofit entity helps develop the project, raise funds from investors, and coordinate key activities such as the contract and evaluation parameters.
Jeffrey B. Liebman, the Malcolm Wiener professor of public policy at the Harvard Kennedy School of Government, touted SIBs and PFS contracts, saying the federal government can play a critical role in encouraging SIBs and PFS contracts by, among other things, giving state and local governments more flexibility in how they use federal funds or providing credit enhancement.
Liebman launched a SIB Technical Assistance Lab at the school that has provided pro bono technical assistance to 10 state and local governments developing SIB and PFS projects: Colorado, Connecticut, Illinois, Massachusetts, Michigan, New York, Ohio, and South Carolina, as well as Chicago and Denver. These governments are trying to address a wide range of policy issues such as early childhood education, homelessness, prison recidivism, and diabetes prevention.
But Mark Fisher, a member of the Maryland House of Delegates from Prince Frederick, Md, told the lawmakers that while SIBs are "well-intended," they "unnecessarily bloat bureaucracies," have the "potential of leading to Crony Capitalism" and "do not save money."
Kyle McKay, an analyst with the Texas Legislative Budget Board, that conducted an in-depth study for the Maryland Department of Legislative Services, that led to a recommendation that Maryland lawmakers not pursue legislation authorizing social impact bonds, challenged the claims of SIB supporters.
He told task force members that it is wrong to assume SIBs will provide new capital for programs. In a Massachusetts PFS program aimed at reducing incarceration for at-risk men aged 17 to 23, the state is liable for up to $27 million of payments, while investors only provided $12 million in funding, he said.
"Given the costs of attorneys, consultants, and program evaluators, the potential for a return on investment to third-parties, and a second tier of program managers, using a SIB relative to direct financing will therefore increase pressure on the budget, as the government must set aside more funds than even the investors provide to the program," he wrote in testimony.
But Tim Pennell, an associate for Strategic & Financial Partnerships at Third Sector Capital Partners, Inc. in Boston, said that investors actually provided $18 million for the Massachusetts Juvenile Justice PFS and that, in addition, the service provider, Roca, deferred 15% of its service fees. As a result, he said, the state received a total of $21.3 million in financing to provide services that can generate up to $45 million in gross savings to the Commonwealth.
Warner said, "I'm a little surprised at how the responses are lining up." The task force chair said he thought conservatives would be more supportive of programs involving the private sector.
"I don't know how we get enough venture capital ideas into government," he said.
But Ayotte said, "We need performance measurements for government programs."