Funding Social Programs with Social Impact Bonds

By Jessica Hathaway | Vol . 24, No. 32 / August 2016

NCSL NewsDid you know?

  • Social impact bonds fall under the umbrella of “pay-for-success” initiatives, in which payment is dependent on measurable objectives being achieved.
  • At least 10 states and the District of Columbia have passed legislation to authorize, study or initiate pilot projects using social impact bonds.
  • The first social impact bond was launched in 2010 in the United Kingdom; the United States’ first such bond was initiated in New York City in 2012.

Social impact bonds (SIBs), a financing mechanism used to fund social programs, are gaining interest among policymakers as a way to mitigate the simultaneous demands of tight budgets and rising social service costs. SIBs are a type of “pay-for-success” funding agreement in which payments for services are tied to the attainment of measurable results. SIBs are essentially a contract between a private entity and the public sector under which the private party commits to pay for improved social results that can lead to public-sector savings.

Private investors are typically philanthropic organizations, such as foundations, or banks. Examples in the United States include Goldman Sachs, Northern Trust, Bank of America and the Rockefeller Foundation. They are only repaid (often with interest) if contractually agreed upon objectives are achieved.

One of the most apparent advantages of social impact bonds for states and lawmakers is cost savings and responsible use of taxpayer dollars, because government only pays back funds invested in programs that work. Another potential advantage of SIBs is improved accountability as the bonds can inform future investments. Some policymakers, however, are concerned about whether the private sector should be involved in funding social programs, traditionally a government responsibility.

In order for government to attract a private investor and for the SIB agreement to be successful, there must be evidence that proposed programs are effective at addressing targeted social problems. Further, results, objectives and costs must be clearly identified. Given that SIBs work best in programs with measurable objectives, they are not necessarily applicable to all types of programs. SIBs have largely been used to improve early childhood education, reduce homelessness and address recidivism. Studies and pilot projects are also being initiated in other areas such as child welfare, workforce development and health care.

State Action

At least 24 states and the District of Columbia have considered, are considering or are implementing projects funded by SIBs. Of these, 10 states—Alaska, California, Colorado, Idaho, Maine, Maryland, Massachusetts, Oklahoma, Texas and Utah—and the District of Columbia have enacted legislation. Legislation ranges from establishing study committees to creating funds and supporting pilot projects.

In Colorado, Massachusetts, Texas and the District of Columbia, legislation has been adopted to generally authorize pay-for-success contracts. Other states have enacted more targeted measures. Alaska, California, Maryland and Oklahoma, for example, have enacted laws targeting criminal justice. Legislation in these four states requires various actions, such as assessing the potential use of social impact bonds and authorizing contracts to address recidivism and provide diversion and reentry programs.

Federal Action

There has also been federal interest in SIB-related projects. The Obama administration, with an eye toward evidence-based programming, has introduced a number of pay-for-success proposals, including social impact bonds, although none have been funded. Several federal grant programs support such initiatives, including:

  • The 2014 Workforce Innovation and Opportunity Act (WIOA), housed in the U.S. Department of Labor, allows state and local workforce investment boards to allocate up to 10 percent of grant funds to pay-for-success projects.
  • The 2007 Second Chance Act, housed in the U.S. Department of Justice, gives priority consideration to proposals that use a pay-for-success approach.
  • The Every Student Succeeds Act of 2015, housed in the U.S. Department of Education, authorizes pay for success as an allowable use of state and local funds for certain programs.
  • The 2009 Edward M. Kennedy Serve America Act authorizes the Social Innovation Fund, a program of the Corporation for National and Community Service, to support pay-for-success initiatives.

At time of publication, there are also two federal bills in committee in Congress. One is Senate Bill 1089, The Social Impact Partnership Act, which would support public-private partnerships to address public health and social challenges by directing resources to state and local governments. The second, House Resolution 5170, the Social Impact Partnerships to Pay for Results Act, would provide funding to state and local governments to support pay-for-success projects. It would also establish the Federal Interagency Council on Social Impact Partnerships and the Commission on Social Impact Partnerships to assist with these projects.

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