Social impact bonds legislation advances in Senate despite strong union opposition (Providence Journal)

BY KATHERINE GREGG AND JENNIFER BOGDAN

Journal State House Bureau

kgregg@providencejournal.com

PROVIDENCE — Despite strong opposition from the largest state employees union, a Senate committee has advanced legislation that would pave the way for Rhode Island’s first $25-million experiment in “social impact bonds.’’

Supporters hope the bonds can provide a way of financing social programs for the homeless and incarcerated that the state otherwise could not afford. Opponents worry that it is a risky, untested funding model that could be used as a back-door approach to privatizing social programs.

“We just see this could be a back-door way to privatize the delivery of social services programs … and to most likely reward wealthy investors while you’re at it,” said Jim Cenerini, a lobbyist for Council 94, American Federation of State, County and Municipal Employees.

The legislation advanced last week defines a “social impact bond” as “a contract between the public and private sectors in which a commitment is made to pay for improved financial and social outcomes that result in public sector savings.”

Sen. Joshua Miller, D-Cranston, the bill’s sponsor, said a well-crafted pilot program providing help for traditionally underfunded services would not allow for abuses or a lack of transparency.

“You have to build a structure that would alleviate those concerns. These programs develop as well as the pilot is structured,” Miller said.

Here’s how these kind of “pay-for-success’’ arrangements work, according to the bill:

Investors contract with a government agency to purchase social impact bonds. The proceeds are dispersed to a nonprofit organization to deliver specified government services to a target population.

If the nonprofit saves the state a predetermined amount of money, “in addition to other outcomes, such as positive social results,’’ the investors get their money back, plus a modest return. If the outcomes are not met, the department would not return the investment.

The Rhode Island proposal drew a smattering of testimony in a hearing held on May 22, all positive. Jim Ryczek, executive director of the Rhode Island Coalition for the Homeless, and Diane Lynch, of the “Social Enterprise Greenhouse,’’ were the only ones signed up to testify.

Ryczek recently said the bonds would fill a void in programming because the state budget can’t be expected to shoulder financial costs associated with large-scale, long-term programs. He pointed to Housing First, a program created by state and the United Way of Rhode Island in 2005 to address chronic homelessness.

Fifty adults were housed in subsidized apartments through the program, but ideally the program could be far larger, and that could be accomplished with social impact bonds, Ryczek said.

“We can’t go to the General Assembly and say, ‘We know you’re giving us $2.8 million, but what we really need is $25 million,’” Ryczek said. “It’s very hard to solve a long-term problem on budget constraints.”

Jonathan J. Houston, president and CEO of the Rhode Island-based Justice Assistance, voiced his enthusiastic support in a letter to the senators that envisioned a different kind of use for the money.

He suggested Rhode Island could “realize significant savings in correctional costs by changing the discussion from who should be released from our secured facilities to who should be going into such facilities’’ in the first place. “These savings can be made by providing the financing to create data driven, highly evaluated alternatives to incarceration.’’

He cited as an example a Massachusetts project financed by social impact bonds that provides a “highly structured, long-term, multi-faceted program for 17-25 year old offenders.’’

In Rhode Island, a pilot program that already has General Assembly funding is limited to those awaiting trial with significant substance abuse issues. “It would appear that a reduction within the awaiting trial population of just 3 percent has the potential to save as much as $9.8 million.’’

Miller’s bill envisions a five-year, $5-million-a-year pilot program under the aegis of the Department of Administration, and a study commission to “track and evaluate the progress.’’ There is no duplicate legislation in the House.

Cenerini said the impact of the bonds suggested in the legislation was brought to Council 94’s attention by the International Union. Only a handful of states, including Massachusetts, are using the process. Thus, there is no track record established for the successes or failures of the bonds, he said.

“In essence, they may call them bonds, but what you’re really looking at is a mechanism that would allow a nonprofit to work with a financier like Goldman Sachs,” Cenerini said. “If the program succeeds, the investors should see a return on their investment, but those returns are not necessarily capped. It’s not about improving social services, but about making money.”

Cenerini’s comments reference a Massachusetts bond project that attracted the backing of New York investment firm Goldman Sachs. The bill approved by the Senate Finance Committee last week is now headed to the full Senate for consideration in what could be the last week of this year’s legislative session.

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