Editorial: The promise and risk of social impact bonds (Chicago Tribune)

By Editorial Board

Illinois has launched a pilot program to help at-risk children across the state stay out of trouble. The program will provide intensive and expensive services — counseling, mentoring, tutoring, substance abuse treatment — to guide kids who are wards of the state.

Unlike other state programs, however, this one is costing Illinois ... nothing. At least, not at first.

Several foundations and other investors are bankrolling the $1 million startup. Next year, investors are expected to pour more money into the program so that it can be ramped up to serve hundreds of children over four years.

If the program works — if the state demonstrably saves money — investors stand to reap a return on their investment from the state. If the program doesn't work — if it doesn't produce the agreed-upon goals — investors lose their money. The state doesn't fork over a dime.

The idea — called social impact investing or "pay for success" bonds — is gaining momentum across the country. The concept landed on Harvard Business Review's list of audacious ideas for solving the world's problems. No pressure there.

Yes, this looks to be a promising way for savvy investors to do social good and reap hefty returns on their money. We see how such financing would appeal to Illinois providers — and politicians. Programs can be launched without much, if any, state money. Taxpayers are asked to pay only for success.

However, Illinois officials are still negotiating key details of the program and questions abound. How will "success" be measured in clear, objective terms so the results aren't rigged to guarantee a payoff for investors? What's to prevent taxpayers from overpaying for "success"? Will this program serve at-risk youths better than a traditional social service program? Who judges if the program has measured up?

Case in point:

The investment banking firm Goldman Sachs announced last month that its social impact bond investment in a Utah preschool program had helped 109 at-risk kindergartners achieve academic gains so they didn't have to enter a special education track. The company received a $260,000 initial payout based on the success. But The New York Times reported Wednesday that experts who reviewed the program for the newspaper "quickly identified a number of irregularities in how the program's success was measured, which seem to have led Goldman and the state to significantly overstate the effect that the investment had in helping young children avoid special education." If that's true, Goldman received a larger payout than it deserved.

Chicago also is experimenting with social impact bonds. Mayor Rahm Emanuel launched a program last year to expand early childhood education, funded by nearly $17 million in private investment. The city says it will pay investors for efforts that reduce the number of students who require special education, and increase the number that are ready for kindergarten and score above the national average on third-grade reading tests. In all, 2,600 children will be involved over four years. The city expects to announce the first results, and possibly the first payoff, in the next several months.

If these programs are stringently designed, investors do take risks and an incentive for success is created. An initiative that aimed to reduce the number of offenders who return to prison on Rikers Island failed to reach its benchmarks last summer. Investors lost.

We're all for doing good — and making money. We applaud the instinct of investors who have a social conscience when they invest. Let's remember, though, that investors are supposed to bear the risk here.

There's promise for more efficient delivery of social programs with higher impact and lower cost. But it's not hard to imagine how these efforts could be manipulated if standards aren't high, measurements aren't transparent and outcomes aren't independently determined.

Taxpayers could wind up paying more for social programs that have modest results. And that's no one's idea of saving the world.