Posted By John Griffith
Yesterday the House of Representatives unanimously passed legislation that would meaningfully expand federal support to state and local Social Impact Bonds (SIBs), also called “social impact partnerships” or “pay-for-success” contracts. The bill now goes to the Senate, where similar bipartisan legislation was introduced last year.
As a bit of background, SIBs are a promising tool for creating new public-private partnerships to tackle some of the most pressing social and economic problems facing low-income communities—all while ensuring that any taxpayer investment yields measurable results. Under a typical SIB, private investors provide upfront capital to fund a particular social program. Those investors are paid back by the government—plus a financial return—only if pre-defined social outcomes are achieved. Often the financial return to investors comes from the money saved through a reduction in government spending. If the program falls short, the investors would not recoup their upfront investment and would incur losses.
A total of 11 SIBs have been launched to date in the U.S., and there are dozens more contracts under development covering a wide range of social issues. Enterprise is currently supporting two SIBs—one to reduce the number of days homeless children stay in foster care in Cuyahoga County, Ohio, and another to reduce chronic homelessness in Denver. To learn more about the SIB model, see our recent issue brief on the topic.
So far, all closed SIBs have been devised and negotiated at the state or local level, and the contracts only incorporate state and local budget savings. However, many of these initiatives have the potential to yield meaningful long-term federal savings, such as reduced health care spending through Medicare and Medicaid. This is often referred to as the “wrong pocket” problem, where one government entity takes risk or incurs a cost while another government entity reaps the financial benefits.
The bill that passed yesterday, known as the Social Impact Partnerships to Pay for Results Act (H.R. 5170), would go a long way toward solving the “wrong pocket” problem. Among other things, the bill would establish a new interagency council to identify, support and monitor eligible state and local SIB initiatives that could save federal dollars. It would also create new 10-year, $100 million fund within the Treasury Department to support state and local SIBs in three ways:
- Paying for successful outcomes. The federal government would be authorized to enter into contracts with state and local governments and pay for certain successful outcomes. This would give the federal government a seat at the negotiating table, allowing state and local practitioners to quantify and capture federal savings as part of a SIB’s financial model.
- Support for feasibility studies. Before a SIB can get off the ground, the first step is to test whether the basic financial model is feasible. The bill would make available up to $10 million to support these studies.
- Support for rigorous evaluations. A key part of any SIB is a rigorous, third-party evaluator to track the program’s efficacy and impact. Unfortunately, these evaluations are often difficult to fund fully in the SIB’s financial model. To help mitigate this problem, the bill makes available up to $15 million to support evaluations.
Enterprise strongly supports the Social Impact Partnerships to Pay for Results Act, and we commend the bill’s co-sponsors, Reps. Todd Young (R-IN) and John Delaney (D-MD), for championing this important proposal over the past several years. We urge leaders in the Senate to take swift action to approve the bill in the coming months.
Author: John Griffith
John Griffith is a senior analyst and project manager on the Enterprise Policy team, where his work focuses on housing finance reform and impact investing.