2016’s Top Legislative Issues to Watch (Governing)

Excerpt

Pay for Success

Last year was an eventful one for social impact bonds. The financing tool, which many have begun referring to instead as “pay for success” programs, allows governments to tap into outside funds to pay for promising social interventions with a high upfront price tag. The first social impact bond created in the United States was at Rikers Island in New York. It was aimed at reducing recidivism among juvenile detainees, but it ended prematurely last year when the private investor, Goldman Sachs, didn’t see enough progress.

Part of the appeal of these deals is that taxpayers aren’t on the hook for trying something new and risky, and public officials still get to experiment with different ways to address social ills. But it’s preferable if the risky investment pays off. Salt Lake County announced in October that its social impact bond on early learning programs had resulted in fewer elementary school students needing special education. A month later, The New York Times threw cold water on the results, pointing to several methodological problems that inflated the effect of Utah’s preschool programs.

The results from the initial U.S. projects will likely influence who invests in future initiatives, and what programs they’re willing to fund. At least seven projects in six states are underway. Last year’s mixed results won’t kill social impact bonds, but they may make future projects less ambitious.

For example, Santa Clara County, Calif., launched a pay for success pilot in September that combines several strategies for housing the homeless, each of which has been found to be effective in prior studies. Such evidence-based policies are excellent candidates for outside financing because they appear to pose less risk. The question is whether another category of projects -- less rooted in prior research -- could also emerge. If so, there would be greater risk for investors focused on seeing financial returns.  -- J.B. Wogan