Social Impact Bonds: Phantom of the Nonprofit Sector

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What issue could bring Senator Ted Cruz (R-TX) and Senator Al Franken (D-MN) into bipartisan partnership? Social impact bonds (SIBs)—or pay-for-success (PFS), depending on one’s preferred terminology. Both legislators have been effusive about the reauthorization of the Workforce Innovation and Opportunity Act (WIOA), and Franken seems to have made workforce development one of his top priority issues. A core component of WIOA noted by many of its supporters was the legislation’s $300 million commitment to pay-for-success programming aimed boosting effective, evidence-based efforts in job training.

For the two senators and most of the U.S. Congress, SIBs are real, immediate, substantive, and promising—enough to justify devoting hundreds of millions of dollars to pay-for-success programming on a range of social issues. For others, they are a public policy phantom, largely unproven but highly touted by some academics, a number of private foundations, and a bevy of consultants, and broadly endorsed by Republicans and Democrats, nonprofit service providers and for-profit entrepreneurs. As this issue of the Cohen Report explores, this potentially phantom program is getting serious consideration at the federal government level and in a variety of states.

The WIOA legislation is the latest piece of federal policy promoting SIBs/PFS as an avenue for public policy solutions to knotty problems. According to a fact sheet distributed by the office of Senator Patty Murray (D-WA), the bill’s lead sponsor, up to 10 percent of funding for job training projects administered by local Workforce Investment Boards can be used for pay-for-performance initiatives. Don’t think that this was a throwaway component of the legislation. Social enterprise lobbying groups like America Forward (which played a big role in the adoption of the Social Innovation Fund) lauded the PFS provisions of WIOA. America Forward, in fact, specifically noted its role in working with Senator Rob Portman (R-OH), Senator Michael Bennett (D-CO), and Representative Susan Brooks (R-IN) to get the PFS language included. (America Forward is identified as a “nonpartisan initiative” of New Profit, Inc., which was founded by Vanessa Kirsch, who herself founded Public Allies, and is governed by a 15-person board that includes three executives from Bain Capital as well as representatives of other investment firms.)

In America Forward’s list of the “10 Greatest Hits from the Workforce Innovation and Opportunity Act,” the PFS component ranks first and gets more word-space than any of the other “hits.” Despite exceptionally limited experience in the U.S. and overseas with actual SIB programs or projects, the SIB/PFS juggernaut is going great guns due to enthusiasts such as New Profit. With President Obama’s signing of the WIOA legislation earlier this week, it is an appropriate moment to take stock of where the SIB movement has made inroads into federal and state public policy and where it might go in the future.

Federal pay-for-success

The WIOA’s pay-for-success provision is substantial. As many commentators have written, the amount of money available for workforce development training and placement programs could be as much as $300 million through the Act. PFS in WIOA fits the Obama White House’s longstanding enthusiasm for SIBs. In its Fiscal Year 2012 budget explanations, the Office of Management and Budget observed that Pay for Success Bonds (even though they aren’t bonds) involve philanthropic and private sector investors “to deliver better outcomes” for all levels of government and “minimize risk to government” (because government ostensibly only pays when outcomes are achieved).

In Fiscal Year 2013, the White House called for $100 million for PFS pilot projects. In its FY 2014 package, the White House proposed a $300 million PFS incentive fund to be administered by the Department of Treasury plus $195 million for PFS projects sponsored by the Departments of Labor, Justice and Education. Ironically, the White House suggested that its FY2013 proposal was justified in part by state initiatives such as the one “being implemented…as close as the State of Maryland,” though Maryland’s SIB program was the recipient of a devastating legislative report and eventually stalled in the legislature.

Not surprisingly, the WIOA authorization of workforce development SIBs follows the announcement of an $11.2 million SIB competition administered by the Corporation for National and Community Service’s Social Innovation Fund. With applications due next week, SIF is looking to fund a number of nonprofits and government agencies with grants between $200,000 and $1.2 million to assess the feasibility of PFS efforts and build local capacity to implement them and between $200,000 and $1.8 million for structuring PFS programs. Given SIF’s track record regarding its selection of New Profit as one of the original SIF grant recipients despite much concern about potential conflicts of interest in its selection process, including some trenchant observations from SIF reviewer Paul Light, one might wonder whether the numerous advocates of SIB/PFS programs like this one will do more than influence the agency to reward the major promoters of the concept. Hopefully, nothing that would raise those sorts of suspicions will happen this time around.

Social impact bonds must be a heady experience for a Congress that cannot bring itself to do much of anything in a bipartisan manner. Around the same time as the WIOA legislation was making its way through Congress, Representative Todd Young (R-IN), joined by Representative John Delaney (D-MD), introduced the Social Impact Bond Act with the support of a handful of other members, including a couple with national profiles—Aaron Schock (R-IL) and Joe Kennedy (D-MA). Young, however, is clearly the enthusiast behind the bill and described the purpose of the legislation on his website:

“Under the proposed legislation, the federal government would establish desired outcomes to pressing social challenges that, if achieved, would improve lives and save government money. State and municipal governments could then submit proposals to work towards those outcomes—such as increasing adoption rates of teenagers in foster care, or improving the health and mortality rates of infants born into low-income families—by scaling up existing, scientifically-proven interventions. Private sector investors would provide the capital needed to expand the existing programs, and, if an independent evaluator were able to validate that the desired outcomes were met and money was saved, the investors would be paid back their initial investment plus a small return from the realized government savings.”

The logical implication of the Young legislation would be to convert an unending array of federal programs into potential SIB/PFS funding venues. Their language has a lot of belief and hope instead of evidence for these efforts based on evidence-based programming. For example, Delaney proclaimed, “The Social Impact Bonds already being implemented in the States prove it can be done, and if we want federal savings, we need to get the federal government involved.” As he knows, probably better than most of his colleagues due to a trenchant analysis of SIBs prepared for the Maryland legislature and presented recently in testimony at a congressional hearing, there are only a handful of SIB/PFS programs underway anywhere—perhaps as many as four in the U.S.—and none have reached a point where they can be pointed to a “proof” of the SIB concept.

Delaney added, “This bipartisan legislation harnesses the power of the private sector to improve government services while saving taxpayer dollars.” The history of privatization of public services has not been quite so across-the-board positive as Delaney intimated. Representative Joe Kennedy added an aggressive set of expectations for SIBs in public policy: “By breaking down traditional barriers between the public and private sectors, these tools expand our capacity to address everything from unemployment to child welfare to substance abuse treatment.” Representative John Larson (D-CT) waxed enthusiastic about SIBs’ ability to tap the “entrepreneurial spirit and innovation of the private sector.”

The sales pitch is bold and strong regardless of whether there is sufficient experience behind SIBs to warrant the statements. An organization called Results for America recently convened a discussion with Young and Delaney under the moniker “Moneyball for Government,” involving representatives of the Nurse-Family Partnership, the Center for Employment Opportunities, and the Manpower Development Research Corporation (MDRC)—all engaged in components of current or planned SIB/PFS programs—to embellish the Young/Delaney pitch. Moneyball’s “founding all-stars” are also bipartisan luminaries: former New York City mayor Michael Bloomberg; former director of the Office of Management and Budget in the Obama administration, Peter Orszag; the former director of President Obama’s Domestic Policy Council, Melody Barnes; former Republican Congressman and head of OMB in the Bush administration, Jim Nussle; and former director of the Domestic Policy Council in the Bush administration, John Bridgeland. SIBs may be part of applying the theory of moneyball to government—like Billy Beane’s Oakland Athletics, small money may yield outsized results on the playing field—but a handful of SIB experiments do not constitute a full season’s worth of experience for making the kinds of glowing proclamations that SIB advocates typically do.

Although experience with SIBs is very limited and there are serious questions about how they might function, they have a coterie of advocates who are committed to promoting and promulgating SIB programs and legislation throughout the nation. With major supporters such as the otherwise liberal Center for American Progress (whose Q&A report on SIBs was co-authored by former Obama administration Office of Social Innovation director Sonal Shah), the private sector-lauding SIB concept draws in supporters who one might otherwise expect to have some qualms about the impact of private sector leadership in the solution of social problems.

State social impact bonds

Policy innovations often don’t wait for evidence of their success, even when they are social impact bonds, which are predicated on private and public investment in evidence-based programs. State legislatures have considered several SIB bills or called for feasibility studies in recent months:

  • Earlier this year, the Washington state legislature voted to create a “social investment steering committee” to “develop an implementation plan for at least one pilot program that uses social impact bonds or other public-private financing mechanisms to finance and deliver prevention-focused social or health care services.” As of June, however, supporters of the SIB pilot program were not able to get the legislature to back the legislation with appropriations. Although the primary sponsor of the SIB legislation, Republican state representative Hans Zieger, declared that SIBs would “provide incentives to solve problems versus reinforcing the bureaucratic status quo”—especially, in Zieger’s mind, for K-12 education—Appropriations Committee chair Ross Hunter, a Democrat, took credit for having “killed” the program. Viewing private investment for SIBS as similar to borrowing money, Hunter said that Washington State doesn’t typically borrow money for building social infrastructure. He asked, “If we have evidence to justify an investment, then why not put aside money for it?”
  • Utah this year created the Utah School Readiness Initiative with a significant commitment for SIB programs for “early childhood education programs for at-risk students.” The Utah program follows a 2013 plan forwarded by the Salt Lake County Council for an early childhood education SIB with Goldman Sachs and Chicago venture capitalist J.B. Pritzker as investors, but the state government did not authorize its funding for the deal. Goldman Sachs is the $10 million investor in the Rikers Island recidivism reduction SIB in New York City, which operates under a 75 percent guarantee from Bloomberg Philanthropies, essentially boosting Goldman’s anticipated return on its investment from an already high 22 percent to over 87 percent. Billionaire Pritzker is the younger brother of Penny Pritzker, the Obama campaign bundler who was appointed Secretary of Commerce by President Obama last year.
  • This past spring, the Colorado legislature considered a bill to establish “pay for success contracts for early childhood education services program for the purpose of authorizing the office of state planning and budgeting (OSPB) to enter into state pay for success contracts with one or more lead contractors for the provision of early childhood education services that will reduce the need for the state to provide subsequent education support and other social services.” However, in May, the state senate chose to delay further consideration of legislation for the time being.
  • Funded by the Duke Endowment and the Doris Duke Charitable Foundation, the Institute for Child Successissued a report in May with an enthusiastic endorsement of expanding the Nurse-Family Partnership program and other home visitation programs in South Carolina, concluding that “Pay for Success is a feasible and promising way to improve outcomes for South Carolina children.” It should be no surprise, as the Institute has issued glowing reports on the feasibility of pay-for-success in September 2013 and January 2014 preceding this latest analysis.
  • In California, the Nonprofit Finance Fund (long supported on SIB/PFS activity by the Rockefeller Foundation) and the James Irvine Foundation have launched the California Pay for Success Initiative. As of May, NFF and Irvine announced the selection of five projects: the Center for Employment Opportunities and REDF to reduce recidivism and increase employment prospects for formerly incarcerated persons in San Diego County; the County of Los Angeles to “support the development of a County Blueprint for use by Los Angeles County Supervisors and executives in assessing and implementing potential Pay for Success opportunities”; the City and County of San Francisco to “enable greater focus on preventative services that is aligned with the Mayor’s strategic priorities in workforce development, housing, public health and human services”; the County of Santa Clara for two projects for “the chronically homeless and the acutely mentally ill” including the provision of 100 units of permanent supportive housing; and the Nurse-Family Partnership, “to scale its home visitation program in multiple Bay Area and Orange County locations.” Social Finance, the consulting entity involved in much of the SIB thinking around the country, also reports that it has been working with the California Endowment since 2013 on a “demonstration project in Fresno, California to reduce costs related to the treatment of children with asthma through active management. If the pilot program, which launched in April 2013, is successful, the partners plan to scale the intervention through a Social Impact Bond (SIB).”
  • Ohio also has a number of Pay-for-Success projects being considered. In Cuyahoga County, the PFS project would “help homeless children stay with their own families and avoid the foster care system.” The partners in this effort include Frontline, a provider of mental health services for homeless individuals, the county’s Division of Children and Family Services, the Cuyahoga Metropolitan Housing Authority, Case Western Reserve’s Center on Urban Poverty and Community Development, and Third Sector Capital Partners. Like the California program, Ohio’s exploration of SIB possibilities is related to a grant award from the Rockefeller Foundation to establish new SIB projects around the nation.
  • Ohio’s governor, Republican John Kasich, welcomed the Rockefeller Foundation SIB initiative in his state. In Illinois, a similar effort linked to the Rockefeller Foundation has spurred Governor Pat Quinn to launch efforts to explore SIB possibilities addressing recidivism rates, school graduation rates, and lowering hospital readmission rates. Quinn announced the SIB effort at the annual meeting of the Council on Foundations, prompting the Rockefeller Foundation CEO Judith Rodin to laud the governor for his “visionary leadership in advancing innovative ideas.” The first of Illinois’s SIB projects was announced earlier this year, a Pay for Success initiative to increase support for at-risk youth. The project is sponsored by One Hope United as the lead provider for the Conscience Community Network, a collaboration of seven longstanding child welfare service agencies. Providing technical assistance to the effort is, as in other situations, Third Sector Capital Partners.
  • Connecticut had legislation pending in 2013 and reintroduced in 2014 that would have authorized something akin to a Social Impact Bond, but the specific language seems to limit the structure of the SIB for “accepting a United States Department of Justice fiscal year 2012 Second Chance Act Adult Offender Reentry Program Demonstration Category 2 Implementation grant.”
  • Legislation in Rhode Island this year that would have authorized a SIB pilot program and created a study commission stalled in the state senate as a result of concerns from some interests about the impact of SIBs leading to a tendency to privatize some state services and that the promoters and financial beneficiaries of SIBs seemed to be large Wall Street firms. A significant part of the opposition was led by the state chapter of the American Federation of State County and Municipal Employees (AFSCME). Jim Cenerini, the legislative affairs director and political action coordinator for AFSCME Council 94, explained, “Our skepticism comes from the fact that the impetus for this was created by a large Wall Street corporation that obviously has something to gain, ideologically and financially, from the implementation of these bonds. It seems wrong that already very wealthy individuals should be able to make money off of reducing recidivism.”
  • Hawaii’s Department of Budget and Finance presented a report to the state legislature in December 2013 examining the feasibility of using Social Impact Bonds for early childhood education programs, concluding that “while there is much excitement about SIBs from various sectors of society, including government, philanthropy and investment banking…SIBs are in an infancy stage and have many complexities, [and therefore] it may be prudent to wait at least a few years to see whether SIBs grow into a viable financing tool.”

All of these state government initiatives follow earlier major state SIB announcements, such as a program in Massachusetts in 2012 that included an effort to increase the number of supportive housing units to be produced in partnership with the Massachusetts Housing and Shelter Alliance, the Corporation for Supportive Housing, Third Sector Capital Partners, and the United Way of Massachusetts Bay and Merrimack Valley, and Minnesota’s Pay for Performance Act, which authorized $10 million in Human Capital Performance (HUCAP) bonds for a variation of the SIB model.

The reality is that introducing legislation that adapts the standard language of SIBs, much like the legislation that spread for a couple of years promoting low profit limited liability corporations (L3Cs), is relatively easy. Getting legislation passed and seeing SIBs come to fruition and success are much more difficult. Many states have witnessed SIB legislation come and go over the years. The problem, as the Minnesota Council of Nonprofits’ Jon Pratt told Nicole Wallace of the Chronicle of Philanthropy, is that SIBs have “been overpromoted and oversold…We have yet to have a single transaction completed, and yet multiple states and multiple agencies are jumping ahead.”

Pratt’s point is at the crux of the matter. Any critical thought about SIBs gets volumes of commentary from legions of SIB promoters such as Social Finance, Third Sector Capital Partners, and a bevy of consultants who hope for roles and stakes in the movement. Few researchers have issued much in the way of critical commentary. With foundations such as Irvine, the California Endowment, and particularly the Rockefeller Foundation, whose former VP is now leading the Nonprofit Finance Fund in the SIB movement, it isn’t hard to imagine how much easier it is to get funding to write supportive analyses about the upsides of SIBs and how difficult it might be to get support for critical reviews.

With this beehive of activity promoting SIBs and PFS, none of which have reached a point where they demonstrate success or failure, how much do we really know about the concept? Writing in The Hill last month, Deborah Smolover, the executive director of New Profit’s America Forward, suggested some interesting conclusions about this relatively young policy concept—or about the assumptions behind it. She wrote, “Too often, public programs have no incentive to find the most productive providers. In many cases, they don’t even measure results, making it hard to tell which providers are the most effective. By failing to track outcomes, decoupling funding from effectiveness, and prioritizing compliance with rules (and even proscribing new approaches), most government programs actually discourage innovation.”

Noting that “this innovation cycle rarely operates in the public sphere,” Smolover writes, “In the business world, the opposite is true. There, new value is created every day through innovation. The concept is simple: A product, service, or process is invented and tested. If it is successful, it attracts investment to take it to market, and then to expand its reach. Profits gleaned from the invention can be reinvested in research and development efforts that will result in continuous improvement or new inventions that will displace the original. And if customers don’t want the product, it goes away (unlike government programs that may stay in existence long past their useful life.)”

Besides being an unbelievable slight to everyone who has tried—and in many cases, succeeded—in making government work for poor people in the solution of social problems, Smolover’s view of a pristine private market that doesn’t promote and sell products that people don’t need or that cause harm is almost quaint. Will SIBs and PFS initiatives supported by investors from Goldman Sachs, Bank of America, or J.B. Pritzker lead suddenly to a creative, innovative governmental sector woken from the doldrums that Smolover and her colleagues think envelop those of us who have worked for government? Will, somehow, private sector principles work where government has purportedly failed?

That’s the bet that Ted Cruz, Todd Young, and New Profit are making, imagining evidence of success in SIBs and PFS that really hasn’t been achieved yet, here or overseas. It’s a public policy bet that has legislators of both parties and at the national, state, and local levels hopeful that private capital will somehow discover and fund public policy solutions that wouldn’t come to the fore without SIBs. It is a bipartisan dream built on a belief in the efficacy of the free market system that hasn’t borne much social progress fruit in recent years and rooted in a disparaging view of public servants, who have accomplished more than most free market true believers might ever guess.

  • Steve Goldberg

    I’ll save my substantive comments for another time and place, but your despicable smear of New Profit and the Social Innovation Fund cannot pass unremarked. As you know full well, I refuted your and Paul Light’s fallacious “concern[s] about potential conflicts of interest” when you first made them. See and and and Yet you have the audacity to insinuate that these debunked slanders might now raise “suspicions” that “the numerous advocates of SIB/PFS programs like this one will more than influence the agency to reward the major promoters of the concept.” You forfeit any claim of responsible journalism until you apologize and retract such knowingly defamatory comments.

  • Tara Marlowe

    It does appear that the rush toward marketization of social services and third sector has been happening with very little critical inquiry. A public discussion is warranted. I agree that this is a conversation that needs to happen… before we give in to magical thinking and ideology.

  • Brian O’Shaughnessy,

    The SIB/PFS conversation is about motivating government to fund preventive services, versus large “reactive” programs, especially criminal justice and prisons. Government does not know how to say let’s fund this program that saves money in the long run, versus this more expensive and larger reactive system. This is not a war of the private sector versus the public sector. That mentality is unfortunate and self defeating. Some liberals know how to save money and some conservatives care about root causes, and they can work together.

  • Gladys Tiffany

    The excitement I’m hearing here sounds like a way for Wall Street to create an efficient and profit-making mechanism to undercut the growing nonprofit sector.

  • Mark Fulop

    The ad hominem arguments of Steve Goldberg simply underscores the importance of Rick’s thoughtful update of where we stand today in the nascent world of Social Impact Bonds. Indeed, we have much hypothesized “gray literature” extolling the virtues of the SIB model but still have no definitive outcomes data (that can be readily uncovered in an academic lit review), documenting success with this innovative approach to solving social problems. That is an undisputed fact. It is also a fact that back in 2010 there was quire the firestorm over the botched initial foray of the Corporation for National and Community Service in their Social Innovation Fund. The additional facts that Rick documents considering the political animal that SIB is becoming and pointing out the powerful industries that stand to profit as intermediaries leaves me scratching my head over Goldberg’s attack. Rather than a despicable smear, I see article as, well, good reporting.

  • Mat Despard

    I appreciate RIck urging caution about SIBs, but like any other innovation, SIBs should neither be uncritically promoted nor demonized. I think federal and state governments are proceeding cautiously; appropriation amounts for SIBs, SIF, and other pay for performance schemes are quite modest. And these days, is there really anything bad about a platform for bipartisan cooperation? Why not just fund effective programs as Rick suggests? That’s the nature of the SIB innovation – raising private equity to pay for these programs in a manner that makes it easier to scale up effective programs compared to standard, fiscal year-based government contracting. The two chief potential dangers of SIBs about which I’m concerned are 1) the potential for SIBs to disproportionately shift public and private dollars toward interventions with outcomes that can be measured quantitatively and be subjected to cost-benefit analyses (vs. a host of other social problems that deserve our collective concern and attention); and 2) anything more than a very modest ROI for private equity firms lest social problem solving be bereft with distorted incentives. Maybe SIBs specifically are not the answer, but I don’t think it’s unreasonable for taxpayers and donors to want their dollars going toward efforts that make a discernible, positive difference in people’s lives.

  • Tara Marlowe

    The link does not work.

  • swann

    ck it out interesting