Social Impact Bonds: A Public-Private Solution to Social Problems

What are social impact bonds (SIBs)?  They are a relatively new tool in the field of social finance–public private partnerships that have been established in the United States and throughout the world to address recurring problems associated with all kinds of social issues, including, but certainly not limited to, low-income students’ access to early childhood education, juvenile delinquency, unemployment, homelessness, and prison recidivism.  The goal of SIBs, sometimes referred to as “pay-for-success” financing, is to transition from government-funded remedial activities to government-funded preventive activities in the delivery of social and educational services. SIBs cannot be used to address every social ill, but they provide a results-driven, data-based approach to solving social problems that government has struggled to solve on its own.

The following is a brief step-by-step explanation of how SIBs work in practice, provided by McKinsey & Company:

  1. A governmental entity contracts with an intermediary to broker a SIB.
  2. The intermediary raises capital from private investors.
  3. After raising the necessary capital, the intermediary transfers funding to one or more non-profit service providers.
  4. The non-profits then provide their preventative services targeting a specific social problem in a larger population.
  5. Throughout the process, an evaluation advisor monitors the progress of the intermediary and non-profit service providers and recommends adjustments that may need to be made.
  6. At the end of the process, an independent assessor determines whether agreed-upon performance measures have been met and how much the governmental entity needs to repay the private investors, who are repaid only if the SIB meets its performance targets.*

Since 2010, when England launched the world’s first official SIB aimed at reducing recidivism among nonviolent, short-term prisoners, SIBs have become increasingly popular at all levels of government in the United States.  According to Social Finance, a leading organization in SIB development, the following social impact bonds are being considered or are currently underway in the United States:

  • In Pennsylvania, the City of Philadelphia in July of 2014 released a request-for-proposal for a feasibility study to explore a pay-for-success initiative to reduce recidivism and support at-risk youth.  During the 2013-2014 legislative session, state legislators introduced, or proposed to introduce, legislation dealing with SIBs–ranging from the establishment of social public private partnerships to a study on SIBs by the Legislative Budget and Finance Committee to the utilization of state funds for a SIB pilot program and study. This legislation will probably be re-introduced during the next legislative session (beginning in January of 2015), as well as additional social impact bond legislation.
  • In California, Santa Barbara County approved a feasibility study on the potential use of pay-for-success financing to reduce prison recidivism; and Santa Clara County is looking to use SIBs to address homelessness and acute mental illness.
  • In Colorado, Denver is pursuing a SIB to provide housing and case management to chronically homeless persons who struggle with mental health and substance abuse issues.
  • Connecticut has a pay-for-success initiative designed to help families involved in the Department of Children and Families that have a history of adult substance abuse.
  • Illinois state government is pursuing a SIB aimed at increasing support for at-risk youth involved in the child welfare and juvenile justice systems.
  • Massachusetts is engaged in a $50 million SIB designed to reduce recidivism among justice-involved youth and to house chronically homeless persons.
  • In New York State, New York City in 2012 became the first jurisdiction in the United States to undertake a SIB project, which allocated $9.6 million to reduce recidivism among young men exiting the Rikers Island prison facility. New York State has also appropriated $30 million for SIBs over five years, and it recently announced four pay-for-success projects for the Nurse-Family Partnership, Montefiore Medical Center/Children’s Aid Society, Hillside Children’s Center, and the Primary Care Development Corporation and its partners.
  • In Ohio, Cuyahoga County has recently launched a pilot SIB project to help homeless mothers with children in foster care.
  • Oklahoma has established a pay-for-success revolving fund to provide payment to social service providers for the delivery of predefined criminal justice outcomes.
  • South Carolina is engaged in a SIB that will serve up to 4,000 mothers to improve birth, health, and self-sufficiency outcomes.
  • Utah has launched a SIB to improve early childhood education outcomes, and the governor recently signed legislation creating the Utah School Readiness Initiative, which allows the state to pay for outcomes.
  • Washington, DC is developing the nation’s first SIB designed to reduce teen pregnancy and increase educational attainment for high school-aged youth.**

Most recently, the City of Chicago announced it will engage in a $17 million SIB over the next four years to provide pre-K learning to 2,620 children.***

In addition, at the federal level, President Obama has included $300 million in his 2014-2015 budget to incentivize the use of SIBs at the state and local level; and Representatives Todd Young (R-Indiana) and John Delaney (D-Maryland) have introduced H.R. 4885—bipartisan legislation that would “direct $300 million in federal funds to SIB feasibility studies, evaluation, and outcomes payments on contracts executed with state and local governments.”**** Senators Bennet (D-Colorado) and Hatch (R-Utah) have introduced similar legislation (S. 2691) in the Senate. Both pieces of legislation await consideration before the United States Congress.

*“An introduction to Social Impact Bonds.” McKinsey & Company, May 15, 2012, https://www.youtube.com/watch?v=E6GrQtCh83w

**The United States, State and Local Activity: A Snapshot, Social Finance, November 19, 2014, http://www.socialfinanceus.org/social-impact-financing/social-impact-bonds/history-sib-market/united-states.

***Elizabeth Campbell, “Chicago Will Use $17 Million in Social-Impact Bonds for Pre-K,” Bloomberg, October 8, 2014, http://www.bloomberg.com/news/2014-10-08/chicago-will-use-17-million-in-social-impact-bonds-for-pre-k.html.

****The United States, State and Local Activity:  A Snapshot, Social Finance.

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If you have questions please contact Michelle Vezzani at MVezzani@cohenlaw.com or the public affairs professional with whom you work.