How “pay for success” investing programs can help fix social mobility in the US (Quartz)

By Erika Poethig David D. Fukuzawa 

This story is part of a series addressing a central question: “How Can We Accelerate Social Mobility in America?” The authors are participating in the 2016 meeting of Clinton Global Initiative (CGI) America (June 12-14 in Atlanta), where leaders in business, philanthropy, government, and nonprofits are turning ideas into actions that help strengthen the US economy.

More than 70% of Americans born in poverty are expected to remain there. There is no quick fix for this social mobility problem because it is in large part structural. But there are new approaches that could address its various manifestations.

One of the latest innovations in philanthropy is an approach called “pay for success.” Like other forms of impact investing, the pay for success model is predicated on the assumption that the outcomes matter more than the outputs, and that success should not just be celebrated, but measured.

Also referred to as social impact bonds, pay for success investing allows governments to fund evidence-based social programs that improve outcomes for vulnerable people—and keep their money if the program doesn’t work as planned. This innovative financing mechanism shifts financial risk from the government to a new investor, who provides up-front capital. The investor is only repaid if the program achieves agreed-upon outcomes.

The structure of these deals can help getting and keeping the needed partners at the table. But arriving at such deals isn’t easy. Like all impact investing, the strategy depends on effective collaboration.

The Clinton Global Initiative is an organization that has played a valuable role in advancing the kind of cross-sector partnerships that make these kinds of impact investments possible. The Urban Institute and The Kresge Foundation have leveraged CGI’s model to help align capital with evidence-based initiatives aimed at transforming lives.

A recent successful project made possible by cross-sector collaboration occurred in Denver. Denver mayor Michael Hancock was looking for ways to break the troubling—and seemingly intractable—cycle of housing instability and criminal justice involvement among a subset of his city’s residents.  Rather than offering a short-term band-aid, supportive housing offers a more sustainable platform for finally breaking the cycle. Much needed funds for preventative programs and supportive housing had been steadily drying up, even as expensive remedial and emergency care interventions were also failing.

Of course, the many factors that can contribute to a person getting stuck in a homelessness-jail cycle—such as serious mental illness and substance abuse—cannot be solved by any one system. In the case of Denver, police time, jail days, detox programs, emergency room visits, and other health care expenses all put a significant burden on city taxpayers and rarely left the homeless in a better position.

And so, in 2014, a series of cross-sector dialogues led to an $8.6 million investment in supportive housing. Permanent supportive housing can provide stability and intensive wrap-around services while directly address individuals’ complex needs. Rather than offering a short-term band-aid, supportive housing offers a more sustainable and adhesive platform for finally breaking the cycle.

The project owed its launch to the city and county of Denver’s partnership with a cohort of organizations that have different strengths but share a common interest. These organizations include the Corporation for Supportive Housing, Social Impact Solutions, Enterprise Community Partners, Colorado Coalition for the Homeless, and Mental Health Center of Denver. Going forward, the Urban Institute—the lead evaluator on the project—will work to assess whether this intervention met its benchmarks and help share any lessons learned with other cities and organizations.

Another area in which pay for success projects have seen early success is in childhood education. Last year, CGI America 2015 worked to formulate a helpful early childhood education toolkit for jurisdictions exploring the pay for success model.

Removing the mystery from investing in the youngest Americans is good for families and the economy. There is significant evidence to suggest that when children have healthy, enriching experiences in preschool or pre-kindergarten, they are more likely to grow up to become successful adults who graduate high school and find stable employment. Removing the mystery from investing in the youngest Americans is good for families and the economy. Urban’s work with the Social Genome Project, for example, estimates that improving early childhood development through quality preschool education leads to an improvement of approximately $15,800 in lifetime family income on average, with benefits across all racial and gender groups.

The toolkit—developed with Urban’s leadership and the support of several partners including Social Finance, Salt Lake County and Bank of America—applies this early childhood education lens to pay for success, building on previous projects for vulnerable children in Utah and Chicago. States and communities seeking guidance can use the toolkit to learn about the nuts-and-bolts of a pay for success project—including strategies for measuring and pricing outcomes and performance management—and navigate the evidence underpinning investments in early childhood education. The toolkit is particularly salient for Kresge, which has launched a multi-year early childhood initiative in Detroit, and others who seek to accelerate partnerships to scale what works.

We still don’t totally know how exactly pay for success project will impact society, but so far all evidence suggests it should be considered a critical impact investing tool that can disrupt business as usual and help connect resources with evidence-based programs. Indeed, even the consideration of the model can lead to critical conversations about investing in outcomes—regardless of whether a pay for success project is ultimately employed. This systems change is a necessary step in improving social mobility—by orienting our work around what we know, we are better prepared to achieve it.

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