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.

"The Non Nonprofit" by Steve Rothschild

A friend recommended "The Non Nonprofit" by Steve Rothschild and I'm glad he did, because the book takes a completely different approach to the problem of paying for social services from anything else I have read. The book is organized around seven principles, with an additional chapter about how important it is to put the principles into practice together.

Rothschild is a former executive at General Mills who went on to use his business experience, acumen, and connections to form a nonprofit, Twin Cities RISE!, whose purpose is to reduce concentrated poverty. Notice the use of the word purpose where you might expect to see mission. Organizations need both, Rothschild explains. Purpose guides programming, reinforces a long-term perspective, and encourages flexibility and innovation. Mission, on the other hand, is concrete. It sets out what the organization does (and does not) do; it puts the purpose into operation. Rothschild's first principle? "Have a clear and appropriate purpose."

The other principles are worth bearing in mind also - measure what counts, be market driven, create mutual accountability, support personal empowerment, and be learning driven. All good things, and Rothschild's take on them, particularly the mutual accountability and personal empowerment sections, are worth reading. Alert readers will have notice that so far I have mentioned only six principles.

The seventh is "Create Economic Value from Social Benefit." In this chapter, Rothschild argues that since every improvement in social good creates social value it is up to nonprofits to quantify who is receiving the value and what it is worth. As he puts it, our current approach to financing social service work "doesn't make sense." Why not? We have big problems, but pay small organizations to deal with them. The problems are systemic, but we spend money in one to two year cycles. Nonprofits focused on these issues don't have access to the long-term capital that for-profits do.

Rothschild outlines two alternative approaches to what he calls the "no financial return expected" approach - the one that government and philanthropic funders use now. These approaches go beyond performance based contracting as it is practiced now. Both depend on calculating a firm and credible return on investment.

I have discussed one of the alternatives, social impact bonds, here (as well as its cousin health impact bonds, here.) Rothschild's alternative, and he appears to have invented the concept (and founded an organization that worked for passage of a Minnesota law to try it out), is the Human Capital performance bond. One explanation of Human Capital Bonds is:

Human Capital Performance Bonds . . . are State AA "annual appropriation" bonds that fund high-performing human services.

The bonds pay market rates, and might be bought by private investors, financial institutions, or social investors. As Rothschild puts it:

The basic mechanism of the [human capital bond] is simple: if the social outcomes that a nonprofit generates create economic value that is greater than the state's cost of borrowing the funds, then the state will have both a social and economic incentive to sell the bonds.

Here's a diagram of how it works:

Human Capital bonds have yet to come into existence, even in Minnesota, and there are lots of questions remaining to be answered. For one interesting take, see this article.

Health Impact Bonds

About a month ago I wrote a post about social impact bonds. That post provided a primer; briefly, social impact bonds allow non-profits to obtain funding from private sector markets for new programs. If they are successful in reducing expenses, the bonds will provide for a return to investors. (NB - I know this is a simple description of a complex process. I listed some of the many conditions that must be in place for social impact bonds to work in the previous post. And I include them again at the bottom of this post.)

I received some email about the post, and have done a little more research, and have found several groups that are making efforts to use the same kind of financing arrangement for health care, in this country and in the UK. One approach, that taken by the Young Foundation in the UK, is to develop Health Impact Bonds to support particular health care interventions.

Collective Health, an effort to improve community conditions by using health impact bonds and other innovative financing methods, takes another approach. It focuses on prevention:

To reduce the growth rate of chronic health conditions we must look at the context and quality of life that individuals experience: availability and choices of food; social networks and support systems; cultural influences and physical environments of our homes, workplaces, schools and neighborhoods. Growing evidence suggests that we must invest in these and other “upstream” sources of health—often referred to as the social determinants of health—to improve outcomes and reduce costs in a sustainable way.

This is a different way of thinking about preventive care. As the Collective Health white paper points out, health care is large sector of US economy, employing some 12% of American workers. The number of workers and the large budget for health care - $2.6 trillion - makes it hard to think outside of medical model.

Collective Health would like to see development of Health Capital Markets, alternative investments that will allow capital to flow from impact investors and other sources into new markets, such as Health Impact Bonds as well as alternative financing mechanisms. You can read more about the approach on Collective Health's website, particularly its example of using Health Impact Bonds to reduce asthma hospitalizations in Fresno, California, available here.

As promised, here is a list of features that must all be in place for an impact investment to succeed. (this time I quote Collective Health):

• Target outcomes must be clearly defined and achievable;

• The proposed intervention should reflect best practices;

• Measuring outcomes must be independently validated;

• A clearly defined “savings” or return value should be established; and

• Public agencies, nonprofits, investors and community stakeholders must all be willing to work together. 

  
  
  
  
    
  

The ironclad Monitor and social impact bonds

There's a lot of interest in my earlier post about social impact bonds, and I'll be keeping an eye on the topic and providing updates. In the meantime, here's a link to an interesting column from the Harvard Business Review blog (free when you register) pointing out the special funding arrangements required of the designer of the ironclad ship the Monitor because of:

how challenging the Monitor was to the Navy establishment when its inventor John Ericsson and his partner Cornelius Bushnell asked them to approve its design: not only was it "ironclad" unlike the wooden ships of the era, it sailed almost wholly submerged, with only its strange gun turret cresting the waves.
Here's the key passage for our purposes:

Only after more deft politicking by Mr. Bushnell and more explanations from Mr. Ericsson did the board approve it, and only then with special conditions protecting the Navy. It doled out the $275,000 cost in installment payments, and made them all conditional on the Monitor proving itself in a "test"—meaning an actual battle with the enemy.

The authors speculate as to why a funding method that was used during the Civil War was not used much in the interim but has become a creative tool now.

Arguably, today's public sector has become so generally risk-averse that an arrangement designed for an extreme risk situation —dire military threat, drained war chest, dodgy inventor — now is needed for even the surest bets. Meanwhile, perhaps the ranks (and wallets) of socially-minded investors have swelled so dramatically that it's much easier to round up private capital to take flyers on potential game-changers.

Maybe the explanation is somewhat simpler, having to do with large salaries and low taxes. It's a provocative question in any case, and adds a little more color to an interesting picture.

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.