The New Way to Govern: Paying for Progress (NationSwell)

By Chris Peak

For too long, government has dumped millions of dollars into treating the effects of social ills without ever addressing their causes. Lacking funds or political will, it’s routine for legislators to salve the symptoms rather than cure the disease — let alone prevent new outbreaks. But the pioneers of a new public financing model claim there’s a better way for government to do business.

New partnerships between public and and private, known as social impact bonds (SIBs), are fronting the money for much-needed, underfunded social programs. More importantly, the sponsors argue, these bonds introduce data-driven performance metrics in order to find the greatest return for taxpayers.

These bonds redefine our conception of government. Striving to better the public good doesn’t cut it anymore. SIBs require programs to be successful and to do the work at a cheaper price. They also tilt the emphasis from activities to outcomes. Chances are, there won’t be a second New Deal or Great Society these days. But the innovators of this new form of financing hope to change government, using data to reshape it into an agile, efficient and performance-driven machine that can achieve our most ambitious goals.

SIBs are generating buzz nationwide as an innovative way to fight the most intractable social problems, ones that indiscriminate government spending — without demanding innovation or results — has yet to make a dent in. The bonds (or as they’re now often called, “pay for success” contracts) allow nonprofits to scale their operations with private investment dollars. If their programs prove more efficient at solving problems than the current public services, corporate funders turn over long-term financial responsibility to the government. Taxpayers repay the investors’ up-front capital (with interest and a small return) only if the program works. Otherwise, if agreed-upon benchmarks aren’t met, the public’s off the hook — and backers lose their entire investment.

Governments are already using these bonds to address juvenile justice, chronic and family homelessness and early childhood education. Advocates say the alternative funding model allows cash-strapped governments to experiment with preemptive action that’s normally cut from tight budgets, rather than paying for expensive remedial programs later.

“If we procured music the same way we did social services, we’d all be listening to 8-track recording machines. Thirty years ago, we would have said, ‘This is great technology,’ and there’d be a law that you could only play music if it was on great technology just like this. That really is what social services look like in America,” says George Overholser, CEO and co-founder of Third Sector Capital Partners, a nonprofit with the goal of bringing data-driven performance metrics to government. The public sector has “a hard time recognizing when something new and better comes along,” he believes, but pay for success provides that for communities with “measurable ways that lives can be improved.”

Overholser’s firm serves as a “project intermediary” (essentially, a middle man) between lenders, the government and a nonprofit for the country’s largest SIB to date, an initiative that is aimed at reducing recidivism among at-risk young male inmates in Boston, Chelsea and Springfield, Mass., through behavioral interventions, educational prep and job training.

Here’s how it works: Third Sector Capital raised $18 million in cash from private investors — such as Goldman Sachs’s Social Impact Fund, plus five charitable foundations. Third Sector turns all of that money over to a service provider, in this case, Roca, Inc., a nonprofit that’s been around for 25 years and has developed a four-year program to help young men exit prison’s revolving door and enter the workforce. Over the next seven years, Roca will target a group of 929 men, ages 17 to 23, who are either on probation or aging out of the juvenile justice system.

“This project can be viewed as a laboratory. We are testing and evaluating the types of interventions to prove their worth, quantify their impact, and determine whether . . . this would make a meaningful impact on other young people,” Glen Shor, the state’s former secretary of Administration and Finance, tells The Boston Globe.

With this bond, the investors are repaid by the government (which does not provide any initial funding) only if the program reduces re-incarceration by at least 5.2 percent compared to a control group. The goal, however, is to reduce recidivism by 40 percent. That may seem like a huge discrepancy, but it’s the level at which the Bay State will start saving money. Any less than that, and the program breaks even; any more, and the investors are entitled to a fraction of the savings — which are called “success payments.” That’s because the bonds operate just like any stock market investment, providing a return on a successful investment (though at a much more modest rate, given the risk compared to the market). For Roca and the nonprofit brackers (like Third Sector Capital, the criminal justice-focused The Arnold Foundation or Boston-based New Profit, Inc.), most of that return would be recycled into further scaling or future bond projects.

For a social impact bond to work, “so much needs to be just right: a rigorous way to evaluate impact, a strong cost-benefit analysis, a service provider that can scale with quality, government partners that are willing (and able) to engage deeply, investors and boards that have an appetite to understand and embrace new financial constructs, and last but not least, a willingness by all parties to communicate, communicate, communicate as the multiparty problem-solving process tumbles forward,” Overholser reflected as the Massachusetts initiative began.

The pay-for-success model has been thrown around among policy wonks as “the next big thing” since the early 2000s. During a time when public and charitable coffers are hard pressed to respond to all the existing need, SIBs emerged as a new stream of funding. Shortly after the first pilot project in England (also targeted at recidivism) launched in 2010, the model journeyed across the Atlantic. In 2012, New York City embarked on the first American bond to provide therapeutic treatment to teenagers locked up on Rikers Island, its central correctional facility.

Though none of those projects have been completed, the purpose of the model is already shifting from its early origins. For one, insiders now shy away from the initial term “bonds” since it’s a misnomer because investors aren’t guaranteed payback. More importantly, proponents argue that SIBs are not merely a new revenue stream, like municipal bonds, but a new way of doing business. Because all the funding is centered on data-based outcomes, it forces all the partners involved to rethink their programs. The public is paying for success, not services.

Many of the first bonds focused on recidivism and homelessness because they could be measured with simpler data sets and figures that were readily available — a person’s either in jail or not, for instance — but they are now targeting increasingly complex problems. Projects in Massachusetts and Denver, for example, started out with simple Housing First programs to provide homes to the chronically homeless. But a project launched in December in Cuyahoga County, Ohio, is targeting the much thornier issue of helping mothers who have been in homeless shelters avoid being separated from their children. Additionally, as data capabilities increase, pay for success programs promise to find the best investment of funds for problems like asthma, maternal depression and child welfare, advocates say.

“Historically, the obstacle was that we had no way of measuring social outcomes, but the information revolution has finally reached government,” Overholser says. “It’s now tuned not to what sounds good, but to what’s actually helping communities advance their goals. … We are, in a sense, retooling the way folks get paid to deliver services to the community.”

At city halls and statehouses across the country, lawmakers are studying whether to implement the pay-for-success model in their own jurisdictions. Currently, there’s seven projects underway in five states — rural and urban areas, red as Utah and blue as California — and at least 30 more on the horizon, says Nicole Truhe, government affairs director for America Forward, the nonpartisan public policy arm of New Profit, a venture philanthropy fund. Even the federal government is getting in on the action. Congress already approved legislation appropriating $600 million to assist in repaying bonds related to workforce development from successful state or local projects. Another bill pending would do the same for education dollars, Truhe adds.

“Elements of pay for success resonate with both conservatives and liberals,” she says. “There’s the cost savings efficiency piece to it, and there’s the focus on issue areas that are important to both parties, whether it be juvenile justice, early childhood education or healthcare.”

The question of whether social impact bonds will prove a lasting model or just the latest fad will likely depend on results from these early projects. Some skeptics say that private sector dollars are only being fronted for the bonds to boost a corporation’s image or even to make a profit. These observers say governments could realize the savings through their own pilot projects, innovation labs and direct contracting with established providers. Advocates respond, however, that mustering bipartisan political support for multi-year, multi-million-dollar projects hasn’t happened before and likely won’t anytime soon — especially since, as critics point out, the government must budget for full repayment of the bonds anyways, when a program is successful.

There’s also the question of how to calculate a government’s savings, some analysts worry. One problem stems from the concept of “fixed cost fallacy.” Calculating the expense for each day a prisoner spends in jail, for example, is often done by dividing the total cost of running the facility by the population. Keeping one person out of jail might mean saving on food and medicine, but there’s still the overhead costs, which don’t decrease unless the location is closed, argues David Juppe, senior operating budget manager for Maryland’s Department of Legislative Services. Another criticism leveled at SIBs is “creaming” — resolving the easiest cases or creating short-term gains in order to win success payments — and leaving the taxpayer to foot the bill for the long-term problems that remain unsolved, Juppe adds.

While the full-scale calculations and evaluations are yet to be completed, Roca’s work is already improving the lives of those it reaches. Ralph Bonano, a 20-year-old who grew up across Boston’s Mystic River in the dense suburb of Chelsea, had been assigned to probation after an unarmed robbery. He tried to dodge Roca’s counselors, but they tracked him down and talked to him every chance they had.

After more than a year, Bonano finally softened and started attended Roca’s job training program. He now has a job in a manufacturing plant that makes military equipment and is working toward his G.E.D. Bonano says it gave him and “other kids an opportunity to change and to be treated as a normal person, not just a criminal.” He credits the program with helping him “stay out of jail.”

Before, Bonano’s story would be evidence of success. A life changed. Case closed. The intervention worked. But today, artibers will consider Bonano as just one data point among many. Along with hundreds of other men, he’ll be entered into a complex calculation of avoided incarceration costs, Roca’s price of services, interest rates and income tax. Analysts will see whether Bonano fits the trend or is an outlier and question whether he changed enough to become a profitable member of society. In the emerging era of data-driven governance and payment for success, social good is only worth it if it saves us cash.

It’s still too early to tell whether Bonano is worth the price.