Social Impact Bonds in New York and elsewhere

I last wrote about social impact bonds back in August and its sister health impact bonds about a month later. The field is moving, and it's time for an update. According to news reports like this one, there are 14 social impact bonds (SIBs) issued or in development in the UK. The UK organization Allia, "The Social Profit Society," has issued what it calls a "Future for Children" bond. And New York's own SIB has moved from pilot stage to full implementation.

New York City's efforts focus on youth held at the City's jail at Riker's Island, where a bed costs $85,000 a year. Studies show that youth who have been in custody are likely to return to jail over the succeeding six years. It's obviously better for the youth not to return to jail, and there's a large possible savings in reducing their future days in jail. In New York, the SIB-funded program provides a specialized cognitive behavioral therapy program called Moral Reconation Therapy (MRT) to 16-18 year olds who are held at the City's jail on Rikers Island for four days or more.

You'll notice, from the screenshot illustrating the transactions among the players in New York City's SIB, that there are some differences from the simpler model I described in my earlier post. Evaluation is expensive, and the independent evaluator is funded outside the SIB. So is the work of the intermediary, MDRC. The other major difference is the funding mechanism itself: Goldman Sachs has loaned MDRC, the intermediary, $9.6 million. That loan is backed by a $7.2 million grant from the Bloomberg Family Foundation. If the program succeeds - its break-even point is a 10% reduction in future jail days - the investors profit, and there are large possible savings for taxpayers. If the program does not succeed, Goldman has not put all its money at risk.

Why this structure? Not all social programs are equally successful. The least risky are evidence-based programs, those that have been shown to be successful, at least for a well-defined population over a set amount of time. Other programs, like MRT are quasi-evidence based: the research results are mixed. (One reason MRT was chosen as the intervention is that it fits well into the jail's operations.) New, untested programs are the riskiest. Even tested programs can be risky: a SIB-funded program might require a scale of services that has never been used. The challenges of translating a program that works in one setting (the community) to another setting like a jail also increase the uncertainties.

A couple of other things to note. A lot of learning happened during the pilot period. Although there's no opting out of the prison-based program, a lot of kids weren't participating, and "we had to figure out why," says MDRC's David Butler. In jail, there may be a lot of reasons that have nothing to do with the program, such as administrative and punitive segregation, or programs cancelled due to various jail issues. As in many other social service programs, data collection is a challenge. MDRC staff member Timothy Rudd pointed out other uncertainties to the program as well. Any savings are not spread out evenly over all program years, but become more evident, if they exist, in later years. And while the evaluation will examine the first cohort of participants, those results will be extrapolated to five subsequent cohorts.

So this is a program to watch. I'll keep updating every six months or so, as we see what happens.

Social Impact Bonds: A Primer

Now that the first social impact bond-funded program in New York City (and in the US) has been announced, I realized it was time to start learning about social impact bonds. A primer with some helpful links follows.

1. What are social impact bonds? How do they work?
Social impact bonds are a financing model in which government contracts with a bond issuer to pay for services based on outcomes or achieving performance targets. The bond issuer raises operating funds by issuing bonds, and contracts with service providers to deliver the services. Here's a diagram, based on social impact bond-funded work in the United Kingdom, showing how the money flows:

Source: http://www.independentsector.org/blog/post.cfm/social-impact-bonds-what-s-the-buzz-about

The Center for American Progress has a good article describing social impact bonds in more detail here.

2. Where have social impact bonds been tried?
Peterborough Prison, outside of London, is the site of one effort already underway. The bond issuing organization is Social Finance in the UK. The first US program, in which Goldman Sachs will fund an MDRC program serving jailed adolescents, has just been announced. Social Finance's US arm has identified some additional promising programs.


3. How has the Peterborough program worked out?
It's too soon to know whether the Peterborough prison program will generate a return for Social Finance investors - that information will first come in Year 4 - but you can read an interesting report about the program's promising first year here.


4. What are the benefits of using social impact bonds?
There are several. First is the improvement in evaluation - in order to show that their programs have worked, bond issuers and service providers must undertake rigorous evaluation. At present, there's rarely enough money to do that. Then there's the fact that approaches that appear to work can be ramped up to serve more people faster. That's good for everyone, for taxpayers as well as anyone receiving the services. Furthermore, as the Center for American Progress report puts it:

Government agencies, which might otherwise continue to fund the same old approaches they have funded in the past, would have an incentive to invest in promising new strategies, including preventive services. That’s because the risk of wasting taxpayer dollars if the new approaches fail is transferred to the private sector.

5. Are there barriers or concerns about social impact bonds?
Jeffrey B. Liebman, author of the Center for American Progress report, has identified five:
 a. Not all the interventions that are funded this way will succeed. Those that do must have a net payoff high enough to provide investors in the bonds with a return on their investments.
b. Program outcomes must be clear, measurable, and directly and comprehensively related to the program. And there must be some way of showing both of those considerations. That might require an independent entity to do the reviewing. (I related Jim Manzi's suggestion of a government agency to oversee the design and interpretation of randomized social policy experiements in my review of his book.)
c. The treatment and comparison populations must be defined at the outset in order to ensure that the program does not serve only those easiest to serve.
d. Outcome assessments must include an assessment of what might have happened without the program.
e. Funding agreements should include contingency planning for the shutdown of under-performing programs so as not to hurt the treatment population - or the service provider - if a program is not successful.

Social impact bonds have promise to shake up what can be a slow changing sector. I'll be watching the MDRC and Peterborough programs with interest.