There is no free lunch. Especially when Wall Street is hovering over the table.
That is something that advocates and lawmakers should understand when presented with financing schemes called “Social Impact Bonds” or “Pay for Success.” These schemes turn to investors to front the money for a program that prevents a social ill. The idea is that a successful prevention program generates enough budget savings for the state to repay the financiers their investment plus a profit, with money to spare.
If that sounds too good to be true, it’s because it pretty much is. Existing Pay for Success programs have revealed a host of problems and have raised questions about the best use of public funds. For example, Goldman Sachs financed a widely-lauded recidivism prevention program in New York City that ended in failure this year. At the very least, advocates and lawmakers should take a critical look at Pay for Success proposals.
A Guide to Evaluating Pay for Success and Social Impact Bonds should be required reading for anyone considering Pay for Success or Social Impact Bond programs. The Guide was released today by the American Federation of State, County and Municipal Employees (AFSCME), the Oregon Center for Public Policy and others.
The Guide explains the nuts and bolts of Pay for Success and Social Impact Bonds. It shows why these schemes look better on paper than in the real world. For example, the Guide explains that Pay for Success can turn out to be more costly to the taxpayers in part because it injects a layer of lawyers, intermediaries and consultants into the process. It costs money to strike a deal with Wall Street.
The paper then lays out the key questions that should be asked of any Pay for Success scheme. By asking these questions, advocates and lawmakers can cut through the fog of rhetoric and fanciful predictions by Pay for Success proponents.
I urge advocates and lawmakers in Oregon to take note of this guide, because Pay for Success proposals have begun to appear before our legislature. Just last session, OHSU put forth a well-intended but ill-conceived proposal to prevent children from ending up in foster care. The Oregon Center for Public Policy was one of the voices pointing out the flaws in the proposal. Fortunately, the OHSU proposal died in committee.
I won’t be surprised if the OHSU proposal or some other Pay for Success scheme pops up again in the next legislative session. This time, though, advocates and lawmakers will have a handy guide to help them formulate the questions that should be asked.
Chuck Sheketoff is the executive director of the Oregon Center for Public Policy.