January 24, 2012; Source: The White House Blog | The White House blog recently quietlyannounced that the federal government will invest up to $20 million in 2012 for “Pay for Success” projects to provide preventative services for vulnerable populations through the Department of Justice and the Department of Labor.

The White House states that Pay for Success (apparently the White House’s first adaptation of the Social Impact Bond concept) will provide solutions to concerns such as housing, workforce development, college completion, and high school dropouts. Pay for Success theoretically offers a new way for the government to ensure effective programs reach traditionally and currently underserved communities. The model places the risk of financing such programs on third party investors. Investors and servicers therefore have an incentive to be as effective as possible, because the larger impact they have on the outcome, the larger the repayment they will receive for their preventative services. Pay for Success is strategic in that it supports innovation in broad-based prevention initiatives which are often the first to get cut when budgets are slashed, even though research has proven the potential long-term cost-savings of such programs.

The White House cited high-quality early childhood education programs as an example of preventative services that achieve positive, measurable impacts with a financial return on investment to society. In fact, up to $7 in associated program cost savings are returned for every $1 invested in these preventative types of initiatives.

In the announcement, the White House indicated that federally supported Pay for Success projects will focus on areas of criminal justice, homelessness, education, and workforce development. The notion is that by implementing preventative services, communities could reduce the need for special education, juvenile delinquency or teen pregnancy services and save more money in the long run. The administration’s intent is to support state and local governments through Pay for Success by supporting pilot projects in 2012.

According to the Department of Justice, priority funding will be given to Second Chance Act grant solicitations from highly qualified applicants who incorporate a Pay for Success model in their program designs to improve the outcomes for people returning to communities from prisons and jails. Additionally, by early spring, the Department of Labor will make up to $20 million available for Pay for Success modeled programs that focus on employment and training outcomes through the Workforce Innovation Fund. Federal agencies will be releasing more information on these and other potential opportunities in the coming weeks and months.

Pay for Success is an intriguing model; it has triggered a frenzy of strategy among nonprofits and financial gurus. In a vacuum it could transform the way funders invest their money as well as how nonprofits replicate their programs. However, vacuums rarely exist and politics can convolute the best of intentions (see Bill Schambra’s recent “Mesmerized by Metrics”). The Pay For Success model will be an interesting development to track through this pilot year and beyond.

We’d love to hear what you think.–Saras Chung