DC Social Impact Bond Leadership Part of National Impact Investing Agenda

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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