BY CHRISTOPHER GERGEN AND STEPHEN MARTIN
As we head into the legislative short session and gain greater visibility into the proposed budget for the state, it is apparent that we are going to be operating in a resource-constrained environment for a while to come.
This means we have to make hard choices about what gets funded (such as much needed relief for our teachers) and what gets cut. Within this context, innovative programs to address some of our toughest social challenges often get left behind.
So we would be wise to start exploring alternative investment strategies.
One such strategy is Social Impact Bonds – also known as Pay for Success Bonds. Government identifies a problem it wants to address but can’t pay for through traditional channels. It then sets clear milestones for addressing this problem and a potential payout, generated by cost savings, if these outcomes are achieved. It then works with an independent financial organization to create an opportunity for private investors, and often foundations, to invest. The money raised then gets channeled into programmatic solutions, such as prevention or early intervention initiatives, which ultimately improve social outcomes and save the state money. These savings are then used to repay the upfront investment with interest.
The first social impact bond was created in the United Kingdom in 2010 to pay for a prisoner rehabilitation program. In setting up the bond, the UK government established target outcomes, a timeline, and payment levels if outcomes are achieved. The bond was then financed by private investors who will be repaid when fewer people return to prison.
Last year, Massachusetts launched a similar social impact bond. Focusing on 1,000 young men who are in the probation system or exiting the juvenile justice system and have a high risk of re-offending, the bond raised $18 million from a set of private foundations and investors ranging from the Kresge Foundation to Goldman Sachs. If independent evaluators determine that the seven-year project has successfully decreased incarceration and increased job readiness and employment among the young men served, the Commonwealth will make up to $27 million in success payments to the investors.
New York has announced a similar initiative for former prisoners. Individuals and institutional investors invested $13.5 million and will be repaid with interest based on the four-year program’s success in reducing recidivism and increasing employment (realized through the savings from keeping people out of jail and new revenue from the taxable income).
Based on the growing interest in this new form of public financing, institutions such as Harvard’s Kennedy School of Government are setting up Social Impact Bond Technical Assistance Labs to help local governments design and implement new bond efforts. Initially, Harvard focused on helping six states. When funding from the Rockefeller Foundation allowed them to expand to four more states, 28 state and city governments applied from across the political spectrum.
After Colorado’s selection into the Lab, Democratic Gov. John Hickenlooper said, “Colorado is excited to be among this collective to strategically look at the role social impact bonds might play in solving some of our more complex social issues such as homeless and early childhood development.”
New capital sources
Republican Gov. Nikki Haley of South Carolina stated, “South Carolina is excited to participate in the SIB Lab because we see public-private partnerships as the best way to bring innovative solutions to government. This is another reason for South Carolinians to celebrate as we move to the national forefront in creatively finding ways to improve maternal and child health.”
This spring, Charlotte hosted a conference focused on how alternative financing strategies, such as social impact bonds, could fund early childhood programs. Participants included Ken Dodge from Duke’s Center for Child and Family Policy and North Carolina’s Nurse-Family Partnership and Child Care Resources.
Duke has also established a nationally recognized research center on impact investment through the Center for the Advancement of Social Entrepreneurship. And the Nonprofit Finance Fund has announced an incubator to help organizations across a series of states, including North Carolina, build the capacity to launch a social impact bond.
In an era of budget cuts, North Carolina is primed to create an alternative financing strategy for critical social services. By learning from other states and leveraging private investors, we can generate new capital sources that earn a financial return while helping advance outcomes-based solutions in sectors such as education and workforce development. It’s time to make this promising idea a reality.
Christopher Gergen is CEO of Forward Impact, a fellow in Innovation and Entrepreneurship at Duke University, and author of “Life Entrepreneurs: Ordinary People Creating Extraordinary Lives.” Stephen Martin, a director at the nonprofit Center for Creative Leadership, blogs at www.messyquest.com. They can be reached at firstname.lastname@example.org and followed on Twitter through @cgergen.