How Social Impact Bonds can improve public services while lowering taxpayer costs

Quietly, after bottoming out with a damaging and wholly unnecessary government shutdown last fall, Congress is starting to function again. Republicans and Democrats came together to avoid default earlier this month, we passed a bipartisan Farm Bill, and most importantly, agreed on a two-year budget framework. For the first time since 2010, we don’t have any looming crises on the calendar.

Early next month the White House will release their initial budget recommendations for 2015. I strongly encourage the White House to build on recent bipartisan momentum and include robust support for the Pay For Success model, also known as Social Impact Bonds. With stronger federal support for Social Impact Bonds, we can save taxpayer dollars, ensure policy decisions are evidence-based and accountable, and achieve better outcomes for the public in important areas like education, health care, and social services. 

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Pay For Success is already working in the states and has garnered praise from both Republican and Democratic governors, including Nikki Haley (R-S.C.), John Kasich (R-Ohio), John Hickenlooper (D-Colo.), and Andrew Cuomo (D-N.Y.). Often, policymakers are presented with a choice between cutting spending or implementing policies to improve public services. Pay For Success marshals private sector expertise to do both.

Here’s how it works. We start with identifying a social policy goal which, if achieved, reduces costs to the government. Better government is a goal that both parties share and a number of programs are already under way nationwide.  At Riker’s Island Correctional Facility in New York City, the project involves providing targeted education, counseling and training to incarcerated adolescents to reduce recidivism rates. In Fresno, the project implements an in-home management program for low-income children with asthma to reduce the numbers of emergency room visits.  In Utah, a school district is expanding a preschool program targeted towards at-risk children to decrease the risk of them being placed in costly special education programs.

Innovative approaches like these help us meet our original policy goals of reduced crime, healthier families, or better educational opportunities, in a way that also reduces costs to the taxpayer. This is truly a double bottom-line benefit.

With Pay for Success, initial financing for the project comes from private investors, not the government, with the stipulation that if the project is not successful, the government doesn’t pay anything.  After all, it’s called Pay For Success, not Pay For Failure. If the project is successful, as measured by a mutually agreed-upon third party evaluator, the government pays back the private sector investor plus a modest rate of return.  Since success means future savings from the government, the taxpayer wins in both circumstances. Since the private sector is taking the financial risk, they will use private market principles to ensure that interventions are well designed, further increasing chances for success. 

A number of financial institutions are participating in Social Impact Bonds, which also offer investment opportunities for investors who want both a return on investment as well as the knowledge that their investment is being used for a worthy cause.  We should be doing everything we can on the local, state, and federal level to leverage the increasing amount of private capital available from impact investors, non-profits, and philanthropies to fund Pay For Success initiatives.

One of the most attractive aspects of the Pay For Success model is that it relies upon evidence-based policymaking. Coming to Congress after two decades as the CEO of two publicly traded companies, I believe this approach is essential to good government. How can we improve government services if we haven’t even measured the degree to which those services are working? A key component of these initiatives is that they identify metrics that can be tracked and the evaluation is done by an independent third party, so there is no conflict of interest between the investors and the governmental agency.  Proving success is important, not just for the project financing itself, but also as a model going forward.  While not all outcomes are measurable and it can be hard to isolate variables, it is crucial that when we can measure outcomes, we do so and learn from the results.  

The president has declared 2014 to be a year of action. Despite reports to the contrary, I know firsthand that a number of my colleagues, in both parties, want to get things done. Over the next year, I’m going to work to build support for Pay for Success in Congress and I hope that the Administration does their part as well.

I firmly believe that both parties have good ideas and that many more ideas and solutions aren’t partisan at all. In a time of divided government, we should look to bipartisan solutions. If Pay for Success can work in red states like Utah and South Carolina and blue and purple states like New York and Colorado, they can work anywhere.  When it comes to policies that help people and save money at the same time, there shouldn’t be a partisan divide.

Delaney has represented Maryland's 6th Congressional District since 2013. He sits on the Financial Services Committee. He is a Democratic Freshman Class President and the only former CEO of a publicly traded company serving in Congress

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