Pay for Success Can Stretch Agency Budgets, and Already Has (Governing)

By Patrick Lester

With authorizing legislation that would extend the concept now stalled in Congress, the Obama administration appears to be following an alternate path to supporting the small but growing model of performance-based government called pay for success.

Like performance-based contracting, pay-for-success projects tie payments to proven results. They differ primarily because they often use rigorous assessments to determine their impact and because they rely on third-party financing from foundations and other investors to cover costs until payments are made.

The idea has generated significant interest across a variety of fields, including social services, education and health. Fewer than a dozen projects, however, have actually been brought online in the United States, and progress has been bumpy so far.

The Obama administration and a bipartisan group of congressional supporters are working to change this. In 2015, legislation was introduced in both the House and Senate that would create a $300 million fund and a central interagency council to oversee federal efforts.

However, despite an influential cast of supporters that includes House Speaker Paul Ryan, the legislation has not yet moved. In part, this has been due to skepticism among some Republicans who view it as a possible path to big government, and among some Democrats who are suspicious of third-party financing by profit-motivated investors like Goldman Sachs. Public sector unions are alsowary of its potential for privatizing public services.

More immediately, the legislation has been held up by disagreements over how it would be paid for and by the usual growth in partisanship that occurs at the beginning of an election year.

In spite of these disagreements, there have been bursts of sporadic progress. Over the past two years, Congress has made pay for success an allowable use of funds in educationlabor andtransportation legislation. A major unanswered question has been whether these funds will actually be tapped without the support of a central coordinating body, which the Government Accountability Office has suggested is needed.

Into this void has stepped a little-known initiative called the Social Innovation Fund. During the past year, the program has been quietly providing funding for feasibility studies and technical assistance for dozens of early-stage projects across the country. While only some of them may reach fruition, the program is already filling the coordinating role that GAO and pay-for-success supporters in Congress and the administration have been calling for.

One recent Social Innovation Fund project is especially noteworthy because it is using the program's limited dollars to leverage a much larger pot of federal job training funds at the Labor Department. If successful, the effort could be a model for leveraging the other disparate pots of federal money that have been recently created by Congress.

The project also contains seeds for something much larger. Federal job training programs have a long and somewhat mixed association with performance-based contracting, an idea that has nevertheless gained traction in other federal programs -- most notably in health care as the Health and Human Services Department has begun to aggressively push value-based payments. By demonstrating how analytic rigor could be used to improve these efforts, a modified hybrid could vault from a few million dollars in projects to billions in short order.

Despite its potential to boost federal performance, however, the Social Innovation Fund faces major challenges. The greatest is political. The program is closely associated with President Obama and it is housed within another larger agency, the Corporation for National and Community Service, which is closely associated with President Clinton. Republicans have repeatedly targeted the program for elimination. In a major funding bill enacted at the end of the last year that increased federal funding overall, the initiative was one of the few to be cut.

The program also has some significant flaws. Its authorizing statute includes high financial matching requirements and substantial restrictions on the use of public money, which together act as a significant impediment to local project success. Such imperfections could prove politically advantageous, however, if they give congressional Republicans an excuse to rework the program and claim it as their own.

With the Obama administration now entering its final year in office, the Social Innovation Fund is scrambling to broaden its appeal. One path will lie in demonstrating its importance in the growing movement toward evidence-based policymaking, which Ryan and even the conservative Heritage Foundation have said is needed to improve federal program effectiveness. The other may lie in its central role in the growing field of pay for success.

Patrick Lester is director of the Social Innovation Research Center.