Paying for what works, when it works (The Hill)

By Michele Jolin and Michael Smith

Five years ago, in a bipartisan moment, Congress passed the Edward M. Kennedy Serve America Act, introduced by Sens. Kennedy (D-Mass.) and Orrin Hatch (R-Utah), to expand the mandate of the Corporation for National and Community Service (CNCS) to address our communities’ toughest challenges.

This expansion included the creation of the CNCS-administered Social Innovation Fund (SIF), an idea championed by President Obama, to find and grow innovative community solutions that had substantive, data-backed proof of their impact. Now, a new funding model called Pay for Success (PFS) is poised to build on the success of the SIF.

The SIF is based on the premise that the best solutions to our nation’s toughest challenges are being developed in communities across the country, and often go unseen or unfunded on a national level. The SIF also recognizes that more often than not we make funding decisions based on isolated stories of success or how many clients have been served, rather than tangible impact on those clients’ lives. Five years later, SIF grantees and their private-sector partners have invested more than a half a billion dollars in compelling community solutions.  These ground-breaking partnerships are helping to demonstrate, improve and scale their work across the nation. The demand for these for these services is at an all-time high, yet many nonprofit organizations implementing solutions that work are struggling to access the dollars they need to implement and grow these crucial programs.

PFS financing, sometimes referred to as Social Impact Bonds, harnesses the same innovative spirit that defined the SIF. PFS will also create cross-sector partnerships between pioneering social entrepreneurs, socially-conscious financers and governments at all levels to address persistent problems and ensure a strong return on investment for taxpayers. That is why SIF announced its first-ever PFS grant competition. This competition will address limited availability of funds for planning, feasibility studies, deal structuring, and pipeline development, all of which have constrained growth of the field.  In addition, SIF will share lessons learned every step of the way, on how this approach works and when it works and when it doesn’t, in order to enhance knowledge in the field and begin to test and address questions around the applicability and efficacy of pay for success. The PFS competition grantees will be announced in September 2014.

The PFS financing model allows governments to define a problem and find a non-profit service provider with a track record of success. The government then pays for their services after they have achieved the agreed-upon results. Private sector investors come in to pay for the cost of implementing the solution, an independent evaluator comes in to validate the results, and the private sector investors either get their money back when they succeed, or not, depending on the outcome of the intervention.

PFS financing allows governments to innovate and make smart, results-driven spending choices while limiting taxpayer risk. States across the country are pursuing PFS to tackle problems that have plagued communities for decades. For example, New York is working with SIF grantee Center for Employment Opportunities to reduce the number of individuals who return to prison. South Carolina is studying the feasibility of using PFS to improve the Nurse-Family Partnership, a home visiting program for low-income first-time mothers.

Those two examples also show that this is a bipartisan solution – as Democratic and Republican governors and mayors alike are finding out what can happen when government focuses on improving outcomes and investing funding in programs that work.

PFS is also picking up steam in Congress. In June, Reps. Todd Young (R-Ind.) and John Delaney (D-Md.) introduced the Social Impact Bond Act (H.R. 4885), similar to a PFS Incentive Fund proposed by the Treasury Department, to provide capital to jump-start PFS deals nationwide.  At the end of July, Sens. Hatch and Michael Bennet (D-Colo.) introduced a similar bill, the Pay-For-Performance Act (S. 2691). The bipartisan support reflects the head and heart, bringing private-sector discipline and resources to proven social-sector solutions vulnerable communities so desperately need.

The urgency and complexity of our nation’s challenges require us to disrupt the status quo, move beyond traditional approaches, and explore and experiment with promising new approaches – much as we did five years ago when the SIF was created. At its core, the SIF is about finding solutions that work and making them work for more people. PFS is another critical tool with the same mission – supporting innovation, ensuring solutions have the dollars needed to scale, and paying for results.

Jolin is co-founder and managing partner for Results for America and Smith is director of the Social Innovation Fund at the Corporation for National and Community Service.