Social Impact Bonds: Lessons from the Field

Reposted from the Stanford Social Innovation Review

A year after the British Ministry of Justice piloted social impact bonds to reduce the 60 percent recidivism rate for the 3,000 criminal offenders who passed through the doors of a private prison in Peterborough, UK, the innovative funding mechanism captured the imagination of many social entrepreneurs. These bonds, also known as pay-for-success contracts, promise to transform the relationship between governments, nonprofits, and funders. “Social impact bonds” became one of the top ten buzzwords of 2011. And local governments in England, Australia, Canada, and the US have started exploring these contracts. As state governments at home and abroad prepare to pilot these bonds next year, the processes have already yielded some lessons from the field.

The first lesson is that pay-for-success contacts may ultimately encompass several ways of engaging pure for-profit investors, impact investors, and foundations in producing social returns. Steve Rothschild, an Ashoka Fellow and CEO of Twin Cities RISE! has had some success in Minnesota with one form of pay-for-success contract, which he calls human capital performance bonds. In this mechanism, a state raises funds by issuing general obligation bonds, directs those funds to nonprofits that have generated positive social outcomes and created government savings, and uses cash unlocked by those savings to repay the bondholders. Because the full faith and credit of the state backs these bonds—and no state since World War I has defaulted on its bond obligations—these bonds will allow social entrepreneurs to access capital markets. The $10 million designated toward human capital performance bonds in Governor Mark Dayton’s July 2011 budget made Minnesota the first—and so far the only—state to pass legislation on pay-for-success contracts. Read the rest of this entry →

Sen. Richard Blumenthal today introduced a bill to create a $5 billion Pathways Back to Work Fund and address the ongoing jobs crisis that has left 14 million out of work and millions more underemployed. A companion bill will be introduced in the House this week.

The Pathways Back to Work Fund, modeled on part of President Obama’s American Jobs Act, would create work and learning opportunities for unemployed individuals, those who have exhausted unemployment insurance benefits and those who do not have sufficient work experience or earnings to qualify for unemployment insurance in the first place. Read the rest of this entry →

Is Welfare the Issue?

The assumption that lies in the phrase welfare-to-work is that parents who turn to cash assistance are on the margins of our society and that they need to be coaxed, required, or encouraged to work.  But data commissioned by the Affirmative Options Coalition from the Minnesota Department of Employment and Economic Development indicates that the vast majority of parents turning to cash assistance in Minnesota have already been in Minnesota’s labor market.  Many appear to be using cash assistance as their alternative to unemployment insurance.  In fact only about half of Minnesota’s unemployed workers have access to unemployment insurance – and before the recession, only 40% of the state’s unemployed workers received Unemployment Insurance benefits.   Rather than needing to convince people to work, the more useful questions for welfare policy might be to understand better what is leading to the job loss and what assistance helps the worker reconnect most quickly to a new job.

Generating New Revenue to Attack Social Problems

As government finances grow increasingly strained and foundation endowments struggle just to regain the levels they were at years ago, many who care about our growing societal needs are exploring innovative ways to bring new capital to the table – with a particular interest in tapping the private investor market. Two models currently lead the discussion:

Social Impact Bonds (SIBs)

First launched in the UK and now being explored in the U.S. by both the Nonprofit Finance Fund and Social Finance US, the SIB concept is predicated on the fact that it is far more costly to deal with problems after they grow big than it is to take preemptive action. For example, a program that is effective in keeping at-risk youth from dropping out of high school may decrease costs to the criminal justice system, reduce lifetime use of public benefits, and increase lifetime earnings (and thus lifetime tax payments). The money required to run the program, then, should really be viewed as an investment that “pays off” in very quantifiable terms. Read the rest of this entry →