A new funding model could turn the common complaint that government doesn’t operate like a business on its head and improve efficiency and cut costs in the process.
Under this “social-impact bond” or “pay for success” plan, private companies pay for public services but are repaid with interest if those services generate cost savings.
The Salt Lake Tribune recently reported how the local United Way and Salt Lake County are collaborating on the financing model in a pilot project to show Utah lawmakers the approach can work.
Under the plan, Goldman Sachs and J.B. Pritzker committed $7 million to fund preschool services and will receive 95 percent of any special-education savings to the state until the investments are repaid with interest.
The early results are encouraging. Last month, the United Way of Salt Lake gave the investment bankers a $267,000 check.
Their private funding had allowed about 600 students to enroll in preschool programs, public and private, in 2013. It was expected that 110 of those 4-year-olds would need special education during their kindergarten year. But thanks to the preschool programs, only one of the students required special education.
This, the Salt Lake Tribune reports, “translates to about $281,000 in cost avoidance for Utah’s public education system.”
New York City, collaborating with Goldman Sachs and Bloomberg Philanthropies, is using the strategy in an effort to reduce recidivism among youthful offenders. The private partners are funding an intervention program based on personal responsibility, training and counseling. There are no up-front costs to the public.
The think tank Center for American Progress describes the benefits of the Social-Impact Bond:
“Government agencies define an outcome they want to accomplish and agree to pay an external organization a sum of money if the external organization achieves that outcome. This unusual mechanism promotes innovation in public services by putting taxpayer dollars toward the most effective approaches. This is markedly different from normal funding arrangements for social programs, in which agencies typically commit to funding activities regardless of the outcome.”
Or as the United Way of Salt Lake President Bill Crim put it: “Usually it takes a long time to stop funding things that aren’t working. One of the benefits of pay-for-success financing is you can get a quicker look at whether something is working or not.”
Indeed, it can spare government long-term spending commitments that may not be effective.
This surely sounds simpler than it is. The desired outcomes must be defined and measured. An accurate formula to determine “cost avoidance” must be developed. Spending and results need to be scrutinized.
Still, the method holds great promise for bringing private sector discipline to public services. The Children’s Board of Hillsborough County had good reason to hold a session on the funding model earlier this year. The strategy could be particularly helpful in developing more effective strategies for the homeless.
Given the financial challenges faced by government and nonprofits, state and local agencies would be wise to explore the approach’s possibilities.