Social Finance Responds to Treasury Department RFI

President Obama’s FY2014 Budget included a provision for a one-time, mandatory appropriation of $300 million earmarked for a Pay for Success (PFS) Incentive Fund (IF). The Fund would “encourage innovation and accelerate the use of evidence-based approaches by lowering the risk associated with initial investments.”[1]  Through the IF, the federal government can catalyze the PFS/Social Impact Bond (SIB) market, which seeks to drive investment capital towards evidenced-based interventions and allow all levels of government to save taxpayer money when purchasing positive social outcomes.

In order to guide the Administration’s thinking, the U.S. Department of the Treasury and an interagency PFS working group released a Request for Information (RFI). Specifically, the RFI asks respondents to identify the “best use of the authority…on state, local and tribal performance-based funding mechanisms.” It also seeks to solicit information about the current PFS marketplace, the potential impact of an IF, and possible advantages to taxpayers.

In our response to the Treasury RFI, Social Finance highlights some initial thoughts regarding the potential catalytic impact of a federal IF:

  • Providing Outcomes Payments and Financing Support: Supplemental outcomes payments and/or financing support from the IF would work to catalyze the state and municipal PFS market. As a PFS beneficiary, there is a strong conceptual argument for the federal government to act as an outcomes payor. Indeed, in September 2013 the US Department of Labor awarded nearly $24 million in PFS grants to New York and Massachusetts, which will be used for outcomes payments for PFS programs. Outcomes payments from the IF could be furnished based on two rationales. First, the economics of a project may only work if budgetary savings at multiple levels of government are taken into account. Consequently, the IF may provide supplemental outcomes payments tied to federal budgetary savings that results from a SIB. Second, many states embark on PFS procurements as a way to bank budgetary savings while producing positive social outcomes. Consequently, they may be hesitant to pay for savings outside the timeframe of a PFS contract or for “societal value” not directly accruing to budgetary bottom-lines. This means that certain evidence-backed interventions could be frozen out, producing a net societal/budgetary loss. The IF could take a more expansive view, providing top-up funds that would more accurately reflect the entire suite of public sector benefits generated from a given intervention.

Alternatively, the IF could be tapped to provide financing support, including credit enhancements and/or subordinated loans, to drive the PFS market forward. The federal government is already involved in providing similar types of financing support, if not in the PFS sphere. (One Small Business Administration (SBA) program, for example, guarantees up to 85% of commercial loans to small businesses.) In a PFS project, especially at this early stage, mainstream impact investors have indicated they are generally more concerned with protection of principal than with maximizing return—making federal principal protection (in whole or part) a valuable lure. In the first US SIB, Bloomberg Philanthropies furnished a $7.2 million grant, guaranteeing a large portion of potential losses by the investor, Goldman Sachs. The IF could play a similar role to help attract investors to other PFS projects.

  • Allaying Appropriations Risk: Appropriations risk, the risk that state and local governments will not provide money in future years for outcome payments under a PFS contract, is daunting to many potential investors. In most governments, appropriated funds must be spent within the current fiscal year. However, PFS contracts can range anywhere from 3 to 8+ years – and thus far, only Massachusetts has enacted legislation to mitigate this risk. IF monies could be deployed to address this issue through one of two mechanisms: 1) The IF could be used to incentivize the passage of legislation in other states that is similar to the Massachusetts model; and/or 2) The IF could be used to provide some form of limited insurance for investors against appropriations failure in selected states.
  • Looking Abroad for Inspiration: PFS transactions are being actively considered or carried out across the globe, from Canada to Australia. In particular, the United Kingdom example may provide some insight into how a federal-level fund may be deployed to grow the US PFS marketplace:
    • The UK is considering a range of accommodative PFS policies—addressing tax relief for social enterprise investments, streamlining contracting through the “Red Tape Challenge,” and updating a Financial Services Bill;
    • The Centre for Social Impact Bonds was developed as a central SIB authority. It maintains a “Knowledge Box” in order to aggregate information. Additionally, its associated “Social Outcomes Fund” tops up outcomes payments for promising projects that generate societal value in addition to budgetary savings;
    • The £10 million “Investment and Contract Readiness Fund,” which is managed on behalf of the Office for Civil Society, supports social ventures “to build their capacity to be able to receive investment and bid for public service contracts;”[2]
    • Launched in April 2012 with up to £600 million in capital, Big Society Capital (BSC) is a financial institution focused on social investment. Its goal is to “improve access to finance for social sector organizations and …raise investor awareness of investment opportunities that provide a social as well as a financial return.”[3] Using the 2008 “Dormant Bank and Building Society Accounts Act,” the UK government pledged to seed BSC with “every penny of dormant bank and building society money,” giving it access to £400 million;
    • The Big Lottery Fund (BIG) distributes 40% of all monies raised “for good causes” by the UK National Lottery.[4] It also distributes non-Lottery funding on behalf of public entities such as the Department for Education and the Office for Civil Society. BIG assisted in the creation of the “Social Outcomes Fund,” while also authorizing the Commissioning Better Outcomes fund. Both are aimed at national PFS development.

These entities and initiatives represent a concerted commitment by the UK government to support PFS. The US federal fund may amplify its impact by following the example of the UK’s central government PFS strategy.

In sum, the PFS sphere represents an exciting opportunity for mobilizing investment capital to drive positive social change and to ensure that governments are only paying for verifiable outcomes. However, budgetary and capacity shortfalls may constrain state and municipal governments in their PFS vision, limiting the field to rigorously proven interventions that generate budgetary savings within a short timeframe. A federal IF can drive this nascent market forward, build state capacity, allay investor risk, and experiment in novel areas of social policy. These objectives would help move the US toward more comprehensive, outcomes-based social service provision.

Entry by Daniel Rubin, Analyst

[1] “The Budget for Fiscal Year 2014: Department of the Treasury,” The White House,

[2] “Investment and Contract Readiness Fund,” The SIB Group,

[3] “About Us: Big Society Capital is the World’s First Social Investment Wholesaler,” Big Society Capital: Transforming Social Investment,

[4] “About BIG,” Big Lottery Fund: UK,


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