Social Innovation Research Center

One of the nation’s largest public sector unions, the American Federation of State, County and Municipal Employees (AFSCME), released a report on December 9 criticizing pay-for-success and social impact bonds. The report also listed a number of smaller progressive organizations as co-authors.

According to the report, its aim is “to help advocates identify the critical issues surrounding PFS contracts.”  It cites complexity, high cost, performance measurement difficulties, minimal innovation, and minimized investor risk as potential shortcomings.

The report’s release follows public sector union opposition to a number of local proposals across the country. A local AFSCME chapter opposed a bill before the Rhode Island state legislature. A project in Chicago was opposed by the Service Employees International Union (SEIU) and Chicago Teachers Union (CTU).

The report has drawn positive attention from the National Council of Nonprofits, which represents state associations of nonprofits. One of its members, the Minnesota Council of Nonprofits, was a co-author of the report and its director has written a parallel opinion piece in The Nonprofit Quarterly.

Opposition from progressives could undermine Democratic support for pay-for-success in the House and Senate, where stand-alone legislation has been stalled since it was introduced earlier this year.

However, other pay-for-success provisions have been enacted in other bills, including the recently enacted replacement for No Child Left Behind, a major transportation authorizing bill, and the Workforce Innovation and Opportunity Act last year. Pay-for-success provisions were also included in a bipartisan draft of welfare legislation released over the summer.

The Obama administration also remains strongly supportive of the concept. Last week, the Social Innovation Fund announced the availability of a second round of pay-for-success intermediary grants. (SIRC released a report on the first round winners last year).

Related

• Early Pay for Success Results Prompt Debate over the Meaning of ‘Success’ (November 17, 2015)

An experiment in performance-based financing for government services, called pay for success, has raised questions about what should count as success after mixed results were announced at two demonstration sites in July and October.

The sites — one in Rikers Island, New York, and the other in Salt Lake County, Utah — are part of a growing bipartisan effort to tie social services funding to proven results. Legislation in the House and Senate that would expand the concept, also called social impact bonds, has drawn support from Democrats and Republicans, including President Obama and the new speaker of the House, Paul Ryan.

The idea has also drawn criticism from public sector unions and others who question their reliance on third-party financing and payments to private investors, including private foundations and commercial firms like Goldman Sachs. Supporters counter that such financing makes the projects possible and that when they are successful they often save taxpayers money.

So far, the earliest results have generated differing views about whether they were successful. The first project, the results of which were announced in July, focused on reducing recidivism among youth at a city jail on Rikers Island in New York City. Seemingly a failure, it was subsequently shut down after falling short of its goals. Proponents argued, however, that it was actually a success because it accomplished something that is generally rare but central to the pay for success model: honestly assessing a new initiative and, when it fails, closing it down.

A second project, an early education program for children in Utah intended to reduce the need for more expensive special education, announced exceptionally strong results in October. Those results, however, were subsequently criticized by an investigative story in The New York Times, which suggested that the success metrics were too easy to achieve, an assertion that drew sharp disagreement in Utah.

In each case, the project’s success or failure was a matter of debate largely because of performance information that is not normally available for most social programs.

For the Obama administration, the very existence of such information is a win. Last month it announced a package of public and private initiatives that includes the expanded use of pay for success.

“We continue to be optimistic about this work,” said David Wilkinson, director of the White House Office of Social Innovation and Civic Participation. “PFS helps overcome the barriers to implementing quality, innovative programs for those in need by enabling government to pay only when its standards are met. At the same time it builds evidence about what works.”

Continue reading →

Social impact bonds and pay-for-success are often viewed as synonymous. They shouldn’t be. There is another version of pay-for-success that has been around much longer, is far more widespread, and may be the future of social impact bonds.

Outcomes-based funding – payments to social service and other providers based at least in part on the results they achieve – is an idea that has been around for decades. Unfortunately, the history of this other version of pay-for-success has been far from universally positive.

If the futures of these two very different forms of pay-for-success become increasingly intertwined, it will be important to understand their respective strengths and weaknesses. While the two ideas can be highly synergistic, there is also a substantial risk of recreating the failures of the past.

Two Approaches: Similar, but Different

On the surface, social impact bonds (SIBs) and more traditional outcomes-based funding systems are very similar. Both involve governments paying other (often nonprofit) entities for services that are based at least partly on results.

But there are also a number of important differences. SIBs, at least as they are commonly understood in the United States, typically involve third-party private financing and rely on rigorous external evaluations to determine their impact. By contrast, outcomes-based funding systems usually lack third-party financing and rely on validated administrative data to determine payments.

There is also a significant difference in scale. While SIBs are currently experiencing significant growth, fewer than a dozen are actually operational in the United States and only two have shown any results so far (in Rikers Island and Salt Lake County). By contrast, outcomes-based funding systems are already operating at scale, affecting perhaps hundreds of billions of dollars in annual public funding, including in education, job training, social services, and health care, the last of which by itself comprises a substantial portion of the U.S. economy.

While these differences are significant, they may not be destined to last. As SIBs grow, there are already signs that they may become more like their larger, more established sibling. First, the current financing mechanism for SIBs may not be scalable. Despite the increased availability of social investment capital, the risk-reward ratio may make them financially unattractive to profit-motivated investors, particularly after the failure of the Rikers Island project. Foundation funds, which have provided the bulk of the financing to date, may be too limited to provide sufficient scale. Second, the external impact evaluations used to judge success may be too expensive and impractical once SIBs advance beyond the demonstration stage.

If these limitations prove insurmountable, SIBs may become more like traditional performance-based contracts. At least one national SIB expert foresees such a future, while others have begun to raise questions. If such a convergence does occur, the history and lessons of outcomes-based funding will become increasingly important to understand.

Continue reading →