Bank of America and Social Finance Inc. Study Reveals Potential to Expand Services for Military Veterans Through Innovative Pay for Success Programs

February 18, 2015

New Research Identifies Opportunities to Increase Funding and Collaboration to Scale Effective Services That Measurably Improve the Lives of Veterans and Their Families

NEW YORK – Bank of America today announced the results of a first-of-its-kind study exploring opportunities to use pay-for-success (PFS) programs and other innovative forms of social financing and impact investing to expand social service programs for U.S. military veterans. The study was conducted in partnership with Social Finance, a nonprofit intermediary organization dedicated to mobilizing investment capital to drive social progress through innovative funding models, with the findings now published in a new report, “Improving Outcomes for Veterans: Assessing Pay for Success Opportunities.”

Findings from the study were shared today with senior government and military officials, corporate leaders and veteran-focused service organizations at the George W. Bush Institute’s Military Service Initiative Summit in Dallas. During the event, Bank of America also shared plans to collaborate with the Wounded Warrior Project and Social Finance to further examine the potential for a PFS program to expand workforce development services for veterans, based on findings from the study. These services are vitally important as veterans reenter civilian life and seek employment.

“Thanks to this research, we’ve identified several areas where innovative forms of social finance could help expand services greatly needed by our growing military veteran population,” said Andy Sieg, head of Global Wealth and Retirement Solutions for Bank of America Merrill Lynch. “Providing investors the opportunity to direct capital to services proven to produce positive outcomes gives them the chance to invest in accordance with their values and improve the lives of those who have protected ours.”

Potential to scale veterans services for greater impact
With more than 22 million veterans living in the U.S. today, and as many as 300,000 additional service members expected to leave the military annually over the next five years, services for these men and women will increasingly require additional resources. For this reason, Bank of America engaged Social Finance to help assess the viability of using PFS programs to scale the operations of organizations proven to be effective but that lack the funding needed to have an even greater impact. The availability of sufficient metrics to establish the effectiveness of these services is what makes a measurable PFS program possible.

“There are many effective organizations providing veteran services across the nation, however most need greater and more reliable funding to grow their programs,” said Tracy Palandjian, CEO and co-founder of Social Finance Inc. “Our research has helped identify interventions and programs ready to scale to help more veterans stay healthy, be productive and enrich their lives. At the same time, we hope that these insights will serve as a catalyst to help drive government resources toward programs that measurably improve the lives of veterans and their families.”

The study reflects input from more than 80 interviews with leaders across multiple sectors including military, finance, government, academia, nonprofits and philanthropy – and the screening of more than 70 veteran-serving organizations. Through this study, Social Finance analyzed five key factors for potential PFS programs, including specific veteran populations, evidence-based programs, social service providers, economics and metrics, and outcomes for payors. Among a number of opportunities identified through this research, three have been highlighted where PFS programs could play a role to scale much-needed services:

  • Employment and wellness: Veterans aged 18 to 34 experience unemployment rates higher than those of civilians in the same age group. Findings from the report show potential for a PFS project to support organizations that provides supported employment with mental health services to veterans who are unemployed and have a mental-health diagnosis, such as depression or post-traumatic stress. According to the report, these services increase employment and earning potential, while decreasing reliance on health care services and generating greater tax revenues from increased lifetime earnings.
  • Chronic disease management: The fastest-growing segment of health care spending for veterans comes from those with one or more chronic diseases, including diabetes, chronic obstructive pulmonary disease, heart conditions, renal failure, dementia, and stroke. The report notes that a PFS demonstration project may provide home-based transitional care to prevent hospital re-admissions for pre-9/11 veterans over the age of 65 who are diagnosed with chronic disease. By improving health outcomes and helping veterans become more self-sufficient, according to this report, savings could be achieved by reducing re-hospitalizations and hospital stays.
  • Housing support for female veterans: Female veterans are overrepresented within the homeless population, with their numbers increasing even as overall veteran homelessness is decreasing. Current estimates of homeless female veterans range from 4,000 to 11,000. The report highlights that a philanthropically-funded initiative may reduce or eradicate homelessness for post-9/11 female veterans not currently served by the U.S. Department of Veterans Affairs. According to the report, such an initiative could help reduce the reliance of female veterans on county-level services, and improve the health and educational outcomes for children of female veterans.

“This study helps us understand some of the most important needs of our nation’s veterans and the potential to develop impact investment opportunities that could benefit them, the public sector, private investors and service organizations alike,” said Lewis Runnion, director of military affairs for Bank of America Merrill Lynch.

Click here to download “Improving Outcomes for Veterans: Assessing Pay for Success Opportunities” and read about other promising initiatives and recommendations on steps that could be taken to make them PFS-ready.


Omidyar Network and The Pershing Square Foundation Grant Social Finance, Inc. $4.0 Million to Accelerate Growth of Pay-for-Success Financing

Flexible Funding Will Expand Opportunities and Drive Further Innovation of PFS Nationally

Boston, MA, December 4, 2014 — Social Finance announced today, at a White House Pay for Success Summit in Chicago, grant awards totaling $4.0 million from Omidyar Network and The Pershing Square Foundation to support its operations over the next three years. The flexible funds will be used to expand Social Finance’s transaction and advisory teams, as well as accelerate the flow of Pay-for-Success (PFS) financing (or Social Impact Bond) transactions in the United States. The grants represent funding renewals from Omidyar Network and The Pershing Square Foundation, which were founding supporters of Social Finance.

The funding comes as interest in PFS has increased dramatically across the nation. PFS financing is an innovative funding model that drives government resources toward social programs that prove effective at providing results to the people who need them most. The model enables federal and state governments to draw in greater resources to tackle social problems by tapping private investments for the up-front costs of the programs. PFS ensures that taxpayer dollars are being spent only on programs that actually work. As interest in these projects has accelerated, so too has demand for experts that can evaluate PFS feasibility for various interventions, structure transactions, and manage performance.

Social Finance’s CEO and Co-Founder, Tracy Palandjian, emphasized the value of this funding to the organization’s ability to support the growth of the PFS market. “The flexibility of this financial support is critical,” she stated. “It will allow us not only to strengthen our internal infrastructure but also to pursue high-quality projects, including those that might not otherwise get off the ground due to lack of funding. Our ability to work on high-impact projects in various geographies and issue areas will go a long way toward positioning PFS for long-term success and ultimately helping people in communities across the U.S. gain access to better services. We are grateful to our partners at Omidyar Network and The Pershing Square Foundation for their stewardship and guidance since our early years.”

With these grants, Social Finance will be able to expand its PFS feasibility and transaction development services to execute a greater number of high-quality projects as well as speed innovation by exploring new issue areas. Over the next 12-18 months alone, Social Finance expects to close five projects that are currently in development in Connecticut, Massachusetts, New York State, South Carolina, and Washington, DC. Its advisory team is now evaluating PFS opportunities to benefit veterans, first-time mothers, and the long-term unemployed as well as vulnerable communities in geographies from Tennessee to California and anticipates working with more stakeholders in the coming years.

A leading advocate of impact investing, Omidyar Network has supported PFS as a way to bring private capital to proven solutions. “PFS financing has the potential to connect the social sector with a vast pool of capital for the good of society. From chronic disease management to adult basic education, we believe that PFS can finance greater access to prevention and early intervention programs that can generate positive outcomes for our society. We are excited to continue our support of Social Finance as key leaders in this space” stated Amy Klement, Partner at Omidyar Network.
The Pershing Square Foundation has been a champion of the PFS approach since its introduction to the US in 2011. “Market-based models, such as PFS financing, have tremendous potential to solve longstanding social challenges because of their ability to align incentives among parties that don’t normally collaborate and bring sustainable funding to the table, and we are proud to support Social Finance’s pursuit of this approach,” stated Paul Bernstein, Chief Executive Officer of The Pershing Square Foundation.

Since its founding in 2011, Social Finance has collaborated with stakeholders throughout the United States to assess PFS feasibility for various interventions and develop projects in support of at-risk populations. Last year, it launched one of the first PFS financing projects in the US to improve employment and recidivism outcomes in New York State.

About Social Finance, Inc.
Social Finance, Inc. is a 501(c)(3) nonprofit organization that is dedicated to mobilizing investment capital to drive social progress. The organization focuses on structuring and managing impact investments that unlock capital to finance effective solutions to persistent social problems and drive an outcomes-focused social sector. The firm develops Social Impact Bonds, innovative multi-stakeholder partnerships, that help more people gain access to better services by scaling performance-driven social programs, creating taxpayer efficiencies, and generating financial returns for investors. For more information, please visit

About Omidyar Network
Omidyar Network is a philanthropic investment firm dedicated to harnessing the power of markets to create opportunity for people to improve their lives. Established in 2004 by eBay founder Pierre Omidyar and his wife Pam, the organization invests in and helps scale innovative organizations to catalyze economic and social change. Omidyar Network has committed more than $735 million to for-profit companies and non-profit organizations that foster economic advancement and encourage individual participation across multiple initiatives, including Consumer Internet & Mobile, Education, Financial Inclusion, Government Transparency, and Property Rights. To learn more, visit, and follow on Twitter @omidyarnetwork #PositiveReturns

About The Pershing Square Foundation
The Pershing Square Foundation is a private family foundation, based in New York, founded in December 2006 by Karen and Bill Ackman. The Foundation has committed $250 million in grants and social investments to support exceptional leaders and innovative organizations that tackle important social issues and deliver scalable and sustainable impact. Bill is the CEO and portfolio manager of Pershing Square Capital Management, L.P. For more information visit:

Media Contact

Tracy Barba
Director of Communications, Social Finance


What We’re Reading: Nicholas Kristof and Sheryl WuDunn on the Power of Early Intervention

In a  New York Times Sunday Review article on September 14, Nicholas Kristof and Sheryl WuDunn explore “the way to beat poverty” – through good parenting and early intervention, “ideally in the first year or two of life or even before a child is born.” They highlight the work of Nurse-Family Partnership (NFP), which “dispatches nurses to visit low-income, disadvantaged families and offer counseling on child-rearing.”

As Kristof and WuDunn point out, Nurse Family Partnership’s mission is grounded in the power of early intervention. By working with expectant mothers through the child’s second birthday, NFP prevents problems from emerging and thus improves long-term life outcomes for mother and baby. Rigorous studies repeatedly show NFP’s ability to deliver measurable results, such as more healthy, full-term births, and fewer developmental delays. At the same time, the program generates a positive return on investment by eliminating the need for costly remediation services, such as NICU and special education expenses.

So it is indeed “infuriating” (as expressed by the authors) that NFP is only able to serve 2-3% of first-time mothers on Medicaid. Like most nonprofit service providers, NFP has traditionally relied on government and philanthropy to fund its work, but these sources are increasingly inadequate in an era of scarce resources and soaring need. Emerging models to tap the capital markets have great potential to complement these traditional funding sources.

This is where Social Impact Bonds (SIBs) come in. SIBs are public-private partnerships that mobilize investment capital to scale up the work of evidence-based nonprofits like NFP. SIB financing offers the potential to unlock new sources of capital, drive long term, flexible resources to what works, and allow service providers to focus on their core mission rather than fundraising. SIBs are being actively explored in red and blue states; at the federal level, bipartisan bills in support of SIBs were recently introduced in both the House and Senate.

These diverse partnerships are challenging to structure and maintain, so Social Finance is a nonprofit intermediary that helps to bring stakeholders together, and design and manage these projects. We are honored to be partnering with NFP to develop SIBs in South Carolina, New York and California that will fund NFP’s expanded reach. SIBs cannot solve all our social challenges, but they can play an important role in enabling high-performing organizations like NFP to make lives better for the youngest and most vulnerable of Americans.

Entry by Jane Hughes, Director of Knowledge Management 

An Intern’s Perspective: My Summer at Social Finance

This summer, I had the privilege of serving as the first [Harvard University Institute of Politics] Director’s Intern at Social Finance (SF), a Boston-based nonprofit organization dedicated to mobilizing investment capital to drive social progress.

Central to SF’s work is an innovative financing tool called the Social Impact Bond (SIB), a public-private-nonprofit partnership that has the potential to scale evidence-based social interventions, create taxpayer efficiencies, and generate financial returns for investors. SF structures and manages SIB transactions, and also helps governments and service providers develop the capacity to become stakeholders in these initiatives.

Today, there are four SIBs operating in the United States—directing $50 million in capital to the social sector—and over two dozen additional states and counties actively pursuing SIBs in their respective jurisdictions. These projects are aimed at addressing a diverse array of issues in areas such as health, education, homelessness, criminal justice, and workforce development.

The work I was assigned at SF was engaging and informative, providing me the opportunity to gain real insight into the emerging field of Pay for Success and Social Innovation Financing. In my role as a communications intern, I updated SF’s social networking outlets, marketing materials, and website on a regular basis and took on ad hoc responsibilities as they materialized. The most challenging and rewarding projects I worked on this summer involved constructing a comprehensive database of SIBs in operation and development around the world and writing a post for the SF blog that was later picked up and circulated by the global daily SIB Newsletter.

When I first walked into the office, I was surprised (as most visitors are) by the conspicuous absence of cubicles or partitions. Everyone—from Associates to the Vice President, Managing Director, and CEO— sits side by side at adjoining desks. As I bounced between temporarily available seats over the course of the summer, developing a deeper understanding of different projects and closer relationships with my fellow coworkers, I quickly realized the value of the open floor plan. This unique layout facilitates a collaborative work environment and speaks to the firm’s people-centric culture.

Throughout the summer, I received constant guidance and support from my supervisors, who were just as willing to answer questions in my seventh week as they had been on my first day. The team members, universally inspiring in their knowledge and passion, were always open to sharing their experiences and offering advice. Bonding occasions ranging from impromptu coffee breaks to newly instituted “Food Truck Fridays” were highlights of the internship.

I am incredibly grateful to the SF staff for taking a genuine interest in my development and making me feel like part of the team. I would also like to thank the IOP for coordinating what was truly a fantastic internship experience.

This summer marked a particularly exciting period of growth for this nascent sector with the introduction of bipartisan federal Pay for Success legislation in Congress (the Social Impact Bond Act in the House of Representatives and the Pay-For-Performance Act in the Senate), the publication of the United States National Advisory Board on Impact Investing’s recommendations for supercharging the industry, and the launch of the Social Innovation Fund’s $11.2 million Pay for Success grants competition.

Though I will no longer be held accountable for remaining informed of such advances in the field, I fully anticipate following the evolution of this exciting space to a mature and established industry trusted to tackle society’s most complex challenges.

Entry by Maddie Sewani, Harvard University ’16

This post was also published by Harvard University Institute of Politics here.

First Official Results Demonstrate Positive Outcomes at Peterborough

Today, Social Finance UK released the first official results on the Peterborough Social Impact Bond (SIB)—the groundbreaking transaction that inspired numerous projects around the world.  An independent evaluator found that the SIB-financed program, One Service, reduced reoffending among the first cohort of 1,000 ex-prisoners by 8.4 percent compared to the national experience.  If this trend continues, investors in the transaction will recoup their principal and earn a positive return when the project concludes in 2016, as this reduction exceeds the performance threshold of 7.5 percent.[1]

Beyond remaining on track to deliver social and financial returns to investors, the project at Peterborough is also demonstrating some of the core benefits of SIBs.  The project catalyzed a policy conversation throughout the United Kingdom about how to better rehabilitate short-term offenders, and the Ministry of Justice recently announced a nationwide program to deliver services to this population.  This underscores the potential for SIBs to spur government reform.

Additionally, the program illustrates substantial operational improvement over time, reflecting the power of data-informed project management and flexibility that are core to the SIB model.  Engagement and uptake of services in prison increased from 74 to 86 percent since services began, and from 37 to 71 percent post-release as One Service adjusted its operations.

As the world’s first SIB, Peterborough has become an iconic program, and in that context we are pleased and encouraged by these results – both as a sign of progress for the Peterborough project itself, and for the evolution of the entire sector.  They indicate that active performance management is critical, that investors are indeed taking on risks, and that the deal was well-structured to benefit all stakeholders in a fair and reasonable manner.  As clear-eyed practitioners in the field, we are well aware of the challenges inherent in launching a new financial instrument, and are mindful of the need for continual learning.  In that sense, early data points like these are valuable to all of us seeking to advance and build a strong field.

Perhaps most important, however, today’s announcement reminds us that the real value of SIBs lies in their ability to improve lives for vulnerable and underserved populations; the financial instrument is a means to an end.  As rigorous evaluation now reveals that the Peterborough project is delivering a meaningful improvement in life outcomes for formerly incarcerated individuals, which translates into fewer crimes, fewer families divided by the return of a father or son to prison, and increased numbers of ex-offenders who find gainful employment. This is the real bottom line, conveying the promise and power of the SIB model.

[1] There was a provision for early outcome payments in August 2014 had the program outperformed and delivered a 10 percent reduction in recidivism for the first cohort.  Investors will not be receiving these early payments, but are well on track to receive outcome payments for both cohorts as scheduled in 2016.

Entry by Jane Hughes, Director of Knowledge Management 

Guest Blog from SFUK Director of Peterborough Project: The One Service Delivers Results for Peterborough Prisoners

Finally we can answer the question about how things are going in Peterborough. All the indicators so far had been positive but it’s great to hear that reconvictions are down by over 8%. If we keep up our hard work, our investors look likely to make a return in 2016.

This project oozes innovation and it has been so exciting to be part of it. The team of staff and volunteers are incredible, as are our local partners, so it is no surprise to find that we have had a positive impact. You often hear people talk about multi agency working but I’ve never experienced it quite like this before. The fact that we had seven years, a flexible budget and one outcome, to reduce crime, resonates with agencies across the spectrum and their buy-in has been fantastic.

It’s been hard to get an accurate sense of performance up until now as the control group hadn’t been created. We do know that clients and stakeholders have been reporting that crime is down and people are changing habits of a lifetime but it is so good to see it in black and white. (It’s official!)

Our clients face multiple barriers and often have entrenched behaviour patterns so this journey hasn’t been an easy one. I am so proud of the way they have embraced the opportunities and made efforts to change their lives. It has been really exciting to see them open up and engage with the service. Some take time to build trust, and progress has been slow and steady over the last three years. This reinforces my view that projects like this need to be long term, so we can establish meaningful relationships and integrate fully into the local landscape. It’s been really hard work and at times immensely frustrating but it’s great to know that it is working.

The One Service was set up to be a seven year project and that is what we all signed up for, so it could evolve and improve further over time. It is a big personal disappointment that it was brought to a close two years early and it is a decision that clients and stakeholders are also struggling to accept. The team will however do our best for the remainder of Cohort 2 and use the learning to date to continue to improve. Thanks for everyone’s support!!

Entry by Janette Powell, Social Finance UK Director of the One Service and the Peterborough Social Impact Bond

DC Social Impact Bond Leadership Part of National Impact Investing Agenda


Today, Social Finance US announced an innovative new impact investment initiative to address the challenge of high teen pregnancy rates in the District of Columbia. This initiative is one of more than twenty new commitments made public at yesterday’s White House Roundtable launch event for the U.S. National Advisory Board report, Private Capital, Public Good: How Smart Federal Policy Can Galvanize Impact Investing – and Why It’s Urgent. The study was produced by the U.S. National Advisory Board (NAB) on Impact Investing, which is co-chaired by Matt Bannick, Managing Partner of Omidyar Network, and Tracy Palandjian, Co-Founder and CEO of Social Finance US.

The NAB’s work grew out of an international effort at the G-7 level to explore the role that impact investing can play in accelerating economic growth and addressing some of society’s most important issues. The report helped to catalyze today’s commitment, which aims to direct more capital into impact investment that intentionally generates financial returns, as well as measurable social or environmental impact.

The report found that the impact investing field is currently at an inflection point, enlivened by new energy but yet to realize its full potential. The authors write, “For impact investing to reach massive scale – bringing private capital to bear on our greatest problems – it will require a more intentional and proactive partnership between government and the private sector.”

In particular, the study highlights strategies and reforms that the government can undertake to “unleash new capital, talent, and energy for social, economic, and environmental good.” These policies, many of which do not require any additional government spending, include: removing regulatory barriers and providing incentives to spur additional private impact investment; increasing the effectiveness of government programs; encouraging and supporting innovative impact-oriented organizations and impact investment opportunities; and improving data capture methods to facilitate accurate, transparent impact measurement.

As the report makes clear, the impact investing industry in the U.S. is not new, but recent years have featured an impressive acceleration of the pace, forward momentum, and innovative thinking in the sector. Social Impact Bonds (SIBs), like the District of Columbia initiative announced today, are one such innovation. In this project, Social Finance is partnering with the District of Columbia government and Wyman Center’s Teen Outreach Program to develop the first ever Social Impact Bond focusing on teen pregnancy prevention. A diverse collaborative of community organizations will deliver this proven, evidence-based program to reduce the incidence of teen pregnancy and improve educational outcomes for thousands of young people in the District. Social Finance and the District of Columbia will work with other stakeholders in the SIB partnership – the Wyman Center, local service providers, investors, and at-risk youth – to craft a rigorous, data-driven project based on Wyman’s nationally recognized, evidence-based intervention.

This program is a prime example of the exciting momentum in the impact investment sector. This SIB-funded initiative will help the government tackle a persistent social challenge by mobilizing investment capital to drive social progress and directing resources toward what works. As a multi-sector collaboration where investors benefit if and only if society does too, this project embodies a fundamental principle of impact investing.

Entry by Lara Metcalf, Managing Director, and Jane Hughes, Director of Knowledge Management

Thoughts on the Future of the SIB Market: A Summary of SSIR Webinar, “Social Impact Bonds: From Concept to Reality”

The Social Impact Bond (SIB) market has recently gained tremendous momentum. Today, there are four SIBs operating in the United States—channeling $50 million in capital to the social sector—and at least two dozen additional states and counties actively pursuing SIBs in their respective jurisdictions. SIBs are also garnering significant attention in the international arena. However, despite the progress achieved to date and media buzz generated by this innovative financing mechanism—there is even a daily global online SIB newsletter—SIBs have yet to achieve proof of concept.

On June 4, the Stanford Social Innovation Review hosted a webinar titled “Social Impact Bonds: From Concept to Reality” to identify what steps will likely need to be taken in order for SIBs to become a well-established, widely-accepted option for funding social interventions at scale. The session featured Social Finance CEO Tracy Palandjian and Sam Schaeffer, the CEO and Executive Director of the Center for Employment Opportunities (CEO).

Tracy delivered an overview regarding the state of the domestic SIB marketplace, focusing particularly on the nation’s first state-payor SIB, a transaction focusing on reducing recidivism and increasing employment in New York. However, she warned that this is not the only appropriate SIB model because at this still-nascent market stage, each deal is unique. “If you’ve seen one SIB,” she said, “you’ve only seen one SIB.”

Sam then shared CEO’s firsthand experience partnering with Social Finance on the New York State SIB. He also presented a framework in order to assist providers in assessing risks and opportunities across six major components of SIB transactions: capital source, investment stake, payment type, performance threshold, geography, and evaluation measures. He explained that in CEO’s first SIB transaction, his team believed it was important to: unlock new private capital without diverting a high proportion of existing philanthropy to the SIB; have zero skin in the game so CEO’s staff could concentrate on executing well; receive unrestricted, upfront funding so they could pay for service delivery as it happened; commit to a performance threshold within the confines of results CEO had previously produced; scale the program in jurisdictions where CEO had proven impact; and focus on measures for reducing recidivism for which CEO had demonstrated effectiveness.

Below are a few key takeaways from Tracy’s and Sam’s presentations regarding the transformative potential of SIBs and the future of this young market:

  • SIBs have the potential to fill a critical gap in the broader continuum of capital available to providers: Tracy explained that foundations in their capacity as grant-makers are in the business of “incubating great social innovations.” In an ideal world, government—as the largest funder of social services—would eventually “take out” philanthropy and “use its strong policy lever to allocate funds” for proven programs run by high performing organizations. The current state of affairs doesn’t reflect this “nirvana,” however. SIBs can fill this critical gap in the continuum by increasing the flow of “1) upfront, 2) multi-year, 3) highly flexible” capital to evidence-based providers in order to “accelerate that link to government uptake.”
  • SIBs represent a model for provider-friendly, performance-based contracting: Sam commented that if all government contracts could be structured like SIBs, “where the marginal costs are paid for, where the full overhead rate is paid for, we would be a much different organization vis-à-vis scaling. This is a great model for how I think performance-based contracting can work for providers.”
  • More experimentation must be done: Tracy stated that more deals need to be launched in order for the industry to fully take flight. “There’s got to be a great degree of experimentation still, because we want to continue to learn…. Standardizing too early could threaten the market if we’re not standardizing the right thing.”
  • SIBs promote much-needed sustained engagement by all parties: Tracy emphasized that “True societal change at scale requires [a] sustained effort over long periods of time.” SIBs are meant to address “gnarly, multidimensional, complex problems that can’t be solved overnight.” The hope is that SIBs “can promote sustained engagement by all parties—the provider, the clients on the ground, [and the] government.”

Both Sam and Tracy remarked on the collaborative nature of the industry. Sam conceded that entering into the transaction was a risk, but explained that the risk was mitigated by the SIB partnership structure. “Based on the commitment we saw from Social Finance, the commitment we saw from New York State—[CEO] knew this was a very good road to pursue.”

All stakeholder groups have contributed to the development of the market so far—“government in catalyzing the space, foundations in providing technical support, and providers in executing the work that improves people’s lives,” according to Tracy. This collaboration must continue. Tracy asserted that whether we can realize “the promise of [SIBs] being a multibillion dollar market to finance significant social change at scale” will be up to all players in the market and whether they can collectively continue doing the on-the-ground work that generates results in the coming years.

Entry by Maddie Sewani, Harvard Director’s Intern

First of Its Kind: Federal SIB Legislation Introduced

The pace of exploration regarding Social Impact Bonds (SIBs) has picked up at the federal level. President Obama’s FY2015 Budget included nearly $500 million in Pay-for-Success-related (PFS) funding, including a $300 million Treasury “Incentive Fund” and millions in Social Innovation Fund (SIF) grants. There are clear indications that the SIB conversation is moving forward at the federal level in a fashion already embraced in red and blue states – from Utah and Oklahoma to New York and Massachusetts.

On June 18th, Rep. Todd Young (R-IN, 9th) and Rep. John Delaney (D-MD, 6th) released the first federal-level PFS legislation, the “Social Impact Bond Act.” The draft legislation advances an approach to SIBs that provides an accountable, bipartisan basis on which to bring this still nascent market to the national level. Young and Delaney were joined by four Republicans (Reps. Griffin, Reed, Ross, and Schock) and three Democrats (Reps. Larson, Polis, and Kennedy) in introducing the legislation.

The goal of Rep. Young’s April legislative draft, one shared by the current legislation, was to “Improve the lives of families and individuals in need by funding social programs producing real results; to ensure effective use of federal funds; to scale effective social interventions already being implemented at various government levels; [and] to scale pay-for-performance within the social sector.” This bill represents a good first step toward making that goal a reality.

The $300 million legislation empowers the Treasury Secretary, with the assistance of a Federal Interagency Council, to fund feasibility studies, pay independent evaluators, and provide SIB outcome payments for contracts inked with state and local governments. The SIB Act identifies social policy areas that applications may address as projects with “measurable, clearly-defined outcome[s].” Smartly, policy areas listed are not limited to those appealing primarily to Republicans or Democrats. The bill would support projects focusing on a variety of outcomes – from increasing employment for the long-term unemployed to reducing dependence on federal means-tested benefits to reducing the incidence of low-birth-weight babies.

As a first step towards a SIB contract, states and localities can submit feasibility study applications, which at Treasury’s discretion, the federal government may fund at up to 50% of expected costs (although Treasury may spend no more than $10 million on feasibility studies in total). These extensive feasibility studies will essentially allow for extensive pre-vetting of SIB contract applications, owing to the mandated inclusion of outcome goals, intervention descriptions, target populations served, evidence demonstrating success, projected costs/savings, and other salient factors.

The Act is well-aligned with SIB goals to date. Particularly, both the feasibility and final SIB applications place a high priority on outcomes. And PFS contracts, at their core, allow government jurisdictions to determine an acceptable price to pay for social outcomes. Additionally, by purposing federal money – equal to any federal savings resulting from the contract within a ten-year horizon – towards additional outcome payments, the legislation may open up the market to projects with benefits that accrue across various agencies and levels of government. This is particularly exciting in the healthcare arena, where the Medicaid cost burden is shared by federal and state governments and the federal government picks up the Medicare tab.

The group sponsoring the SIB Act further demonstrates the inherently bipartisan appeal of a concept that promotes the accountable use of taxpayer dollars and an intense focus on measurable social policy outcomes. The legislation provides a strong foundation on which future federal involvement in the SIB market may rest.

Entry by Daniel Rubin, Associate

Social Impact Bonds: Healthy Dialogue on a Young Sector (from The Nonprofit Quarterly)

This article was originally published in The Nonprofit Quarterly and may be found online here:


Those of us with Google Alerts tuned to Social Impact Bonds, or SIBs, have found our in-boxes busier than ever in recent weeks. Toward the end of April, the UK government announced that the world’s first SIB, at Peterborough prison, would wind down early because the government would be financing the program itself starting in 2015. Barely a week later, there were Senate hearings on SIBs, which we found to be both balanced and intelligent, so we were surprised to discover that Rick Cohen seemed to have a different impression.

Now seems like a good opportunity to reflect on questions and concerns regarding SIBs. We at Social Finance share some observers’ worry about the gap between the hype and the reality of SIBs. Senator Angus King’s question, voiced at the Senate hearings, “Why doesn’t the government try to get it right?”—instead of financing social programs with private capital—resonates with us as well. And we understand Senator Kelly Ayotte’s puzzlement when she wondered aloud why the Massachusetts SIB involved $12 million in private capital but $27 million of outcome payments.

We view this as part of a healthy dialogue on an innovative and new mechanism to re-imagine the role of capital markets in social services; we welcome and even share many of these questions and concerns. The Senate hearings were an important part of this dialogue, in which senators posed questions that deserve a more thorough response than the limited time frame and format of the hearings allowed.

Do SIBs save the government money?

Senator Ayotte’s question about the $12 million to $27 million gap is the most easily answered, but unfortunately the Senate hearings did not allow time for a full response. The Massachusetts project involves $12 million in private capital, plus $6 million in recoverable grants (philanthropic grants that will be recycled for other philanthropic purposes). The $27 million is the maximum outcomes payment possible under the contract; at this level, the state would realize around $18 million in net savings—after the outcome payments have been made.

Indeed, a hallmark of all SIBs, including the New York State Social Impact Partnership led by Social Finance US, is the understanding that performance-based outcomes payments from government never exceed the savings and benefits accruing to the public sector. In the New York State project, for example, should a 40 percent reduction in prison recidivism be achieved, the outcome payments would total $21.54 million while the public sector benefits total $37.34 million. These numbers should lay to rest the suggestion that SIBs do not deliver cost savings.

Two of the Senate witnesses, who worked on a SIB analysis for the state of Maryland that recommended against the use of SIBs, referenced their report in citing a lack of cost savings. However, we challenge some of this report’s key assumptions, including those around marginal costs, multiple streams of value, recidivism and victimization reduction, and target population. The report assumes, for example, that a SIB would be focused on offenders with the average recidivism rate. However, a SIB targeting higher risk individuals (like those in Massachusetts and New York) would yield a larger absolute reduction in recidivism and, thus, more savings.

Also, SIBs are about much more than short-term savings. As Senator Mark Warner observed at the hearings, SIBs are “designed to ensure that government only pays for what works.” This stands in stark contrast to the “base budgeting” norm, which is framed by the prior year’s funding level rather than outcomes. Referring to base budgeting, Senator Ayotte quoted Ronald Reagan’s remark that “There’s nothing closer to eternal life than a government program.” SIBs are designed to break this mold.

SIBs also support evidence-based spending patterns and incentivize public-private partnerships. The Peterborough SIB, for example, is ending early not because it hasn’t worked, but because it has. Partly thanks to the SIB-financed project, government has become convinced of the value of funding reentry services for all short-term ex-offenders like those being served at Peterborough, and is taking on the responsibility for funding nationwide programs in the future. As Professor Jeff Liebman noted at the Senate hearings, SIBs are “useful for breaking through…obstacles to reform.”

And perhaps most important, short- to medium-term cost savings are only one aspect of the social and economic value that SIBs can deliver. We can monetize the budgetary savings achieved when SIB-financed support services succeed in keeping an ex-prisoner out of prison and gainfully employed over a 3-5 year time frame. What is left out of that equation, though, is the broader social improvement that derives from lower crime and a more productive citizenry.

Do investors demand an exorbitant risk premium?

Senator King suggested that the only way SIBs would work was if the funders took on substantial risk—for which they would expect to be compensated by a substantial risk premium, i.e., high returns on their investment. In a similar vein, some articles about the Peterborough events have suggested that future investors will be deterred from participating in future SIBs because of the early winding-down of Peterborough.

In fact, these statements reflect a misunderstanding of the motives of SIB investors. SIBs do not and should not appeal to finance-first investors, who are primarily motivated by profit maximization. Rather, SIBs are designed for double bottom line or impact investors, who seek social value alongside financial value. As Bank of America Merrill Lynch Managing Director Liam O’Neil recently remarked of their participation in the NYS project, “We were increasingly being told by our clients that they wanted their investments to be reflective of their values.”

Thus, expected returns on the Massachusetts and New York State transactions are in the low-to-mid-single digit range, which does not reflect a substantial risk premium. And from the Peterborough investors’ point of view, if the SIB contributed to government policy reform that removed the need for SIB financing, that is definitely a win.

Do these complex programs make heavy demands on scarce government resources?

Senator Ayotte worried, quite rightly, about the complexity of SIBs and the resultant demand on scarce government resources to structure and manage the projects. One of the witnesses argued that smallish pilot programs like Peterborough do not generate “significant” cost savings.

They’re right.

But this is the very nature of pilot programs and new models; as Senator Warner pointed out, SIBs are “a tool to leverage innovation.” Senator Whitehouse underlined this by commenting that government doesn’t do the “prototyping function” very well. In fact, all of the witnesses agreed that SIBs facilitate the innovation process by bringing in private capital to shoulder the risks of innovation. If all goes well and the SIB proves the value of up-front investment in preventative social services, then these services will become policy and the SIB financing is no longer needed. As in the Peterborough case, this counts as a win.

Why doesn’t government do this itself?

We wish they would. If government fully funded effective, evidence-based social programs aimed at preventing the emergence of serious problems like homelessness and substance abuse, then SIBs wouldn’t exist – and the world would be a better place.

But the fact is that they don’t. The Nurse-Family Partnership, which provides home visiting services to low-income, first –time mothers, is one of the most effective service providers in the U.S. As columnist Nicholas Kristof wrote in the New York Times,

This organization sends nurses to visit poor, vulnerable women who are pregnant for the first time. The nurse warns against smoking and alcohol and drug abuse, and later encourages breast-feeding and good nutrition, while coaxing mothers to cuddle their children and read to them. This program continues until the child is 2.

At age 6, studies have found, these children are only one-third as likely to have behavioral or intellectual problems as others who weren’t enrolled. At age 15, the children are less than half as likely to have been arrested.

For all of its clear value, however, Nurse-Family Partnership only has the resources to serve four to five percent of its target population every year.

In the absence of adequate funding from government and philanthropy – in the imperfect world that we inhabit – there is a role for private capital to help fill this gap.

No more silver bullets

Finally, let’s agree to retire the “silver bullet” charge once and for all. Those of us with knowledge and experience in the SIB market have never and will never assert that SIBs are a silver bullet for all social problems; this is nothing more than a straw man that SIB opponents like to use. Let’s agree to free our future dialogue of empty claims, hype and hyperbole—for the benefit of all.

In this frame of mind, we welcome the probing questions that have arisen around the Senate hearings and Peterborough announcement, and we appreciate the opportunity to add our thoughts. SIBs embody a new approach to private-public partnerships, so the field is enriched each and every time a creative dialogue emerges.


Entry by Jane Hughes, Director of Knowledge Management at Social Finance US, and Alisa Helbitz, Director of Research and Communications at Social Finance UK.