Step by Step Innovation in Utah

An exciting early childhood education initiative is underway in Utah, which will lay the groundwork for a long-term funding strategy to enable future three and four-year-olds to benefit from high-quality early education programs.

Earlier this summer, United Way of Salt Lake City, J.B. Pritzker, and Goldman Sachs announced that they would launch a one-year, $1 million SIB demonstration project to send 450 children – who would otherwise be waitlisted – to pre-school this September. Per the announcement, if an additional payor or payors were secured, the project could expand to benefit 3,700 kids with a multi-year financing of up to $7 million dollars.

There is a lot to inspire us and learn from in the Utah transaction:

1. Bringing together multiple partners takes time and dedication; successful Social Impact Bonds need champions. The original strategy in Utah was to have the State act as payor of outcomes for the Social Impact Bond. Unfortunately, the necessary enabling legislation narrowly failed to pass. Fortunately, United Way of Salt Lake City (UWSLC) stepped forward and agreed to be the payor of outcomes for  up to $1 million during the first year. Their leadership not only allowed the project to take off; it also demonstrates how philanthropy can help accelerate the adoption of Pay for Success (PFS) strategies.

2. Philanthropic leadership can inspire government action: In forging ahead with the project, UWSLC took a risk that the government might not step in as payor to take the work to scale. This week UWSLC’s leadership was matched by that of the Salt Lake County Council, which voted to provide $350,000 in additional outcomes payments. This allows the program to serve an additional 150 children this year, for a total of 600. We are encouraged by the Council’s actions and are eager to see whether the state joins the financing in the future.

3. Salt Lake County Council recognized the value in purchasing educational outcomes: Much of the work in SIBs thus far has focused on issue areas like criminal justice where government sees immediate cost savings from reducing incarceration rates. Education is a longer term investment that requires government to acknowledge the extended, multi-sector benefit of investing in children. The case for investing in young people is clear. Until now, governments in the U.S. had not yet determined how to participate in education-based PFS financing. Salt Lake County’s participation in the Utah project is one way that government can recognize the value of early education, and leverage that long term value for upfront investment in children. Just as Salt Lake County Council recognized UWSLC’s leadership and decided to participate in this project, we hope that other governments will follow Salt Lake County’s lead in pursuing innovative ways to use PFS financing to scale early childhood education.

Entry by Rebecca Leventhal, Director

“SIB” Terminology Gains Acceptance

There has been a fair amount of debate in the market over the “SIB” term, as some argue that SIBs are not, in fact, bonds, and that the terminology confuses some market participants and observers. As last week’s White House convening made clear, however, the SIB term has gained general acceptance for the moment.

In fact, it is reasonable to consider SIBs a bond-like instrument. Investopedia defines bond as “a debt investment in which an investor loans money to an entity (corporate or governmental) that borrows the funds for a defined period of time at a fixed interest rate.” This definition, of course, is the root of the angst, because SIB interest rates depend upon the performance of the project, and thus are not fixed.

Further investigation, though, indicates that the term “bond” actually covers a wide variety of instruments with lots of different bells and whistles.  Convertible bonds can be converted into equity, so share many characteristics of equity. Zero coupon bonds make no coupon payments, but instead are issued at a discount to par value. High-yield bonds are issued by entities that do not qualify for investment-grade ratings by the leading credit agencies; they carry a higher risk of default and correspondingly higher interest rates than other bonds.

Thus there really is no such thing as a “typical” bond. SIBs share features of both debt and equity, like convertible bonds; and investors bear a higher risk of losing their principal, like high-yield bonds. So is a SIB a bond? Close enough, anyway – and it seems to be the generally accepted terminology at present.

Entry by Jane Hughes, Director of Knowledge Management

UK Launches Fund To Break Down Silos

We at Social Finance are excited and inspired by Big Lottery’s launch of a new £40 million fund to support the SIB market in the UK. In partnership with the Cabinet Office’s £20 million Social Outcomes Fund, which was announced last November, the funds will be used to address the challenge of government silos – a challenge in the US market as well.

Specifically, the monies will be used in situations where savings resulting from the use of a SIB would be distributed across several public sector bodies, such that the costs would outweigh the benefits for each of the bodies individually. As our upcoming White Paper, due to be published in September, observes:

The problem, of course, is that social problems are not siloed but multifaceted, spanning sectors and levels of government and foundations alike. This means that responses to these problems must be equally multifaceted – but traditional divisions within the government do not support this hybrid approach.

By supplying funds that local, state, and federal government entities can use to pay for successful outcomes, the UK initiative is an important step in the development of the SIB market.

Any chance of the US following in their footsteps?

Tracy Palandjian Speaks at White House Convening

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On July 8, Social Finance CEO Tracy Palandjian participated in a White House Convening on Advancing the Practice of Pay for Success, a full-day event that brought together an extraordinary group of cross-sector leaders to discuss past, present, and future developments in the industry.

Panel discussions covered the lifecycle of a Pay for Success deal, the state of play of Pay for Success (PFS) in the US, and catalyzing investment in PFS. Palandjian, who took part in the latter panel, commented on the pre-conditions for SIB market success as well as the challenges that lie ahead. In addition, the US Treasury Department spoke about the PFS incentive fund proposed in the President’s 2014 Budget, and the Rockefeller Foundation discussed the future of PFS highlighting the role foundations can play in building the market. The U.S. Department of Housing and Urban Development discussed the potential of PFS to benefit housing initiatives in the US.

Institutional investors also participated in the event. Bank of America Merrill Lynch spoke about the organization’s deep and long-term commitment to PFS and highlighted Social Impact Bonds as “an idea whose time has come.”

Read the White House Blog for their take on PFS as an innovative approach to improve results and save government money.