Opinion: Tackling welfare initiatives through Social Impact Bonds (The Record

BY DAVID STOESZ, THE RECORD

NEW JERSEY could make history by launching a bold experiment, the transition from a social welfare state to a social investment state. During the last decade, government "pay-for-success" projects using Social Impact Bonds (SIBs) have begun to transform the public sector, including education, corrections and social services. However, New Jersey has remained on the sidelines of innovation, relying on old mechanisms that are out of political favor and are inadequate to address the state's wide variety of social welfare needs.

SIBs serve as an alternative to government funding by attracting investors to finance initiatives that deliver predetermined, measurable outcomes, which are assessed by an independent evaluator. If the objectives are met, investors recoup their capital plus a government assured bonus; if promised outcomes are not achieved, investors are paid nothing. So structured, SIBs offer an innovative way to capitalize social programs while introducing a degree of accountability that eludes traditional social programming.

In the past decade, SIBs have evolved to finance a number of projects. Massachusetts authorized an SIB to address homelessness, and Illinois launched an initiative to divert juveniles from detention. Funded by Goldman Sachs, a Utah SIB provided services to developmentally delayed preschoolers who might have been diverted to costly special education; initial results indicated that only one of 595 children was referred to special education, so the state paid the investment firm for savings from reduced school spending.

Accompanying the expansion of SIBs, intermediaries have evolved to finance projects. In addition to venerable organizations, such as Goldman Sachs and the Rockefeller Foundation, new capital networks have emerged, including Social Finance and Third Sector Capital Partners. Technical assistance has also improved; Harvard's SIB Lab consults on several projects. Like any social innovation, the SIB learning curve improves as stakeholders acquire more knowledge and experience putting private capital to public purpose.

An ideal environment

New Jersey provides an ideal environment for SIBs. The state's economy, once ranked among the top five nationally, has stalled, prompting new thinking about funding social programs. Between 2010 and 2013 the state's growth in GDP was only one percent, half the national rate. The Great Recession contributed to an upsurge in poverty: From 2004 to 2014, New Jersey's poverty rate jumped 41 percent. As public assistance benefits lagged behind family needs, the number of children living in extreme poverty, below half the federal poverty level, increased from 131,000 in 2010 to 139,000 in 2014.

Despite rising poverty, the conventional approach, relying on federal funding, is unlikely to address the gap between family needs and public resources. Since the 2010 midterm election, congressional Republicans have checked federal spending. Indeed, under the Obama presidency, federal appropriations have grown only 1.6 percent annually, the lowest since the Eisenhower administration. Clearly, Washington will not fund social programs as it has done in the past.

In light of these developments, it is unfortunate that New Jersey has faltered in deploying SIBs. The Social Innovation Act, which passed in 2014, would have provided $15 million in loans through the New Jersey Economic Development Authority to pilot SIBs, but it was vetoed by Governor Christie. Rather than reject an innovation that has enjoyed bipartisan support, the governor could exploit Trenton's proximity to Wall Street and introduce his post-presidential persona by convening a special commission to explore how SIBs could benefit New Jersey.

A simple thought experiment would suggest multiple benefits of an array of SIB pilots in New Jersey: Functional Family Therapy diverts juveniles from detention to community care, reporting a benefit of $11.19 for every dollar invested; for the Nurse Family Partnership, through which nurses visit first-time mothers, the fiscal benefit-to-cost ratio is 2.89 to 1; Tutoring by Peers in elementary school produces a ratio of $144.09 to $1. Dozens of other interventions have been found to produce positive, cost-effective outcomes, yet most of New Jersey's social infrastructure is not evidence-based, imposing substandard services on citizens and unnecessary costs on taxpayers. An aged, inefficient infrastructure of programs can be reconfigured by offering investors the opportunity to use SIBs to subsidize effective services that contribute to the well-being of New Jerseyans.

Good governance

In an age of austerity, the financing of social programs predicated on outcomes that are positive as well as cost-effective is simply good governance. To be certain, SIBs upset partisan conventions, disabusing liberal Democrats of their dependence on public funding for social programs and conservative Republicans from their denial about the effects of abject poverty.

Objections notwithstanding, the benefits of SIBs are becoming undeniable. A full complement of SIBs could well mark New Jersey as a state that, confronted with rising need and static resources, embraced a future of innovation in social policy.

David Stoesz is Social Work Program director at Kean University's Nathan Weiss Graduate College in Union.