Massachusetts Mulls Private Finance for Public Services

Published August 18, 2011

At the request of his Executive Office for Administration and Finance, Massachusetts Gov. Deval Patrick (D) has received 34 proposals on how best to employ what’s called social innovation financing. The proposals came from both nonprofit and for-profit organizations working on issues such as homelessness, adult and juvenile corrections, and education.

If the proposals come to fruition, this would be the first social innovation financing initiative in the United States.

Social innovation financing, which includes social impact bonds and pay-for-success contracts, is a creative approach to supporting innovative service delivery programs, said Alex Zaroulis, director of communications at the Office for Administration and Finance.

Return Based on Success

Through social innovation financing, socially minded private investors back service delivery programs in sectors traditionally under government jurisdiction. If the programs meet a previously specified measure of success, the government could save money—part of which would be used to refund investors with substantial returns. If the programs fail to produce results, the government would owe investors little or nothing.

“Social innovation financing . . . [ties] payments to performance metrics, thereby allowing states to pay only for proven, rather than promised, results, said Zaroulis.

She said there are two big benefits of social financing: improving efficiency and performance management in service delivery, and encouraging business and competition while posing almost no risk to taxpayers.

Begun in United Kingdom

In 2010, Social Finance, Inc. launched the Peterborough Social Impact Bond pilot program in the United Kingdom. The company raised £5 million from private investors to perform interventions for offenders serving short prison sentences in Peterborough. The goal of the project is to save the government money by reducing recidivism.

In January of this year, the company opened its separately incorporated Boston affiliate, and it has since submitted a proposal to Gov. Patrick’s office. Steve Goldberg, managing director and general counsel of Social Finance’s Boston branch office, described the company’s role as offering a “soup to nuts approach” to social impact bonds.

“We want to offer the Commonwealth a one-stop shop where we will find the nonprofit organizations, we will find the investors, we will raise the capital, we will launch all the projects, and oversee the projects over the whole six to 10 years of the bond,” said Goldberg.

Roca, Inc. is one such nonprofit organization that works with Social Finance, and it submitted its own response to the governor’s request. The organization works with young people who’ve been in trouble with the law. The program consists of two years of intensive counseling aimed at behavioral change, and two years of follow-up, often with transitional employment.

“It’s all about getting young people to change their behaviors and motivating them,” said Lili Elkins, director of development and strategic initiatives at Roca.

Reduced Recidivism

In Massachusetts, the overall recidivism rate for young offenders tops 40 percent. Roca boasts that in 2010, 98 percent of its program graduates did not commit another offense within a year. Additionally, 79 percent retained their employment, and 90 percent had no new pregnancies.

Roca officials say these statistics provide promising support for corrections-related social financing because the programs meet two crucial marks for social impact bond candidates: proven nonprofit success, and savings large enough to fund investor returns.

Massachusetts spends $45,000 annually per incarcerated person. Estimates show lifetime expenses to the state for a high-risk individual average between $250,000 and $2 million when social services and other factors are considered.

Roca, in contrast, invests about $5,000 a year per youth over three to four years through their alternatives to incarceration.

Monetary Savings

“[Massachusetts] is saving money regardless of what happens during those four years just because [those in the program are] not in prison,” said Elkins. Even if Roca fails at reducing recidivism, and 50 percent of the youths commit another offense, the state would still see net savings projected at $25.5 million. If a more realistic 20 percent reoffend, the state could save $37 million, Elkins said.

Projects aimed at alleviating homelessness demonstrate similar merits in terms of proven success and savings, and Social Finance has included this option as another use for social impact bonds. More than other forms of social innovation financing, social impact bonds place the burden almost solely on private investors, with virtually no risk to taxpayers.

“We’re reducing demand for government services to save money,” Goldberg said.

President Obama has included up to $100 million for social impact bond pilot programs in his 2012 budget, mainly for education.

Elizabeth Henderson ([email protected]) is an assistant legislative specialist at The Heartland Institute.