Social Impact Financing: A New Approach
Results of the Public Opinion Focus Group on
Educating for Opportunity and Social Impact
Financing on November 19, 2014
Compiled by Erik Randolph on behalf of the Lincoln Institute of Public Opinion Research, Inc.
February 2, 2015
ABSTRACT: With the assistance of the Pennsylvania Association of Nonprofit Organizations, the Lincoln Institute of Public Opinion Research convened a public opinion focus group on the issue of social impact financing (SIF) as an innovative approach to using private dollars to fund increases in public programming and reduce the need for costly social services in the future.
Social impact financing, also known as social impact bonds or pay for success financing, is an innovative financing mechanism whereby private investors finance social programs with the objective of increasing positive outcomes and decreasing public dollars spent on remedial measures. If the programs are successful in meeting benchmarks specified in the contract and verified by an independent third party evaluator, the investors receive a return on their investments based on the public sector savings. Discussion points included the following:
• What is Social Impact Financing?
• What types of programs are best suited for Social Impact Financing?
• What is the government’s level of involvement?
• What levels of government can successfully use Social Impact Financing?
• What happens to the savings that are realized through social impact financing programs?
• What other non-monetary benefits can result from social impact financing projects?
o The use of an independent evaluator can help service providers effectively quantify their programs and benefits and can help public funders reduce wasteful spending to ineffective programs.
o The level of collaboration necessary for a successful Social Impact Financing Program requires improved efficiency and collaboration among government agencies and service providers.
• What is currently being considered in Pennsylvania and where are we in the process?
Public Opinion Focus Group: Beyond Poverty—November 19, 2014 Session 1: Educating for Opportunity: Social Impact Financing: 10 a.m. – 12 noon
During the 2013-2014 legislative sesson, the Majority Policy Committee of the Pennsylvania House of Representatives created the Empowering Opportunities: Gateways-Out-of-Poverty Initiative. This Republican Caucus initiative recognizes that current efforts to address poverty are in need of revision and subsequently searches for opportunities to address barriers that entrap individuals in impoverished conditions and to replicate outcome-based solutions.
The initiative is divided into five broad areas for the development of policy and legislative proposals: Outcomes That Matter, Life Skills 101, Benefits That Work, the Essentials, and Educating for Opportunity. With the assistance of the Pennsylvania Association of Nonprofit Organizations, the Lincoln Institute of Public Opinion Research convened a focus group on proposals in the areas of Educating for Opportunity and Outcomes That Matter.
The focus group consisted of leaders from the non-profit sector who provide human services to alleviate social problems associated with poverty. The Honorable Todd Stephens, State Representative for the 151st Legislative District of Pennsylvania, presented on the topic of Social Impact Financing (SIF) for early childhood education programs as part of a developing legislative proposal.
Social impact financing, also known as pay for success financing, is an innovative financing mechanism whereby private investors use private dollars to fund increases in public programming in order to reduce the need for costly social services in the future. For example, if a program meets specified goals as measured by an independent third party evaluator, then the governmental entity responsible for funding that program pays the investors a return on their investment. If the SIF-funded programs are successful in producing the desired outcomes, governments save money through the averted future costs, more efficient implementation, or both. If the programs do not meet the negotiated benchmarks that result in reduced government spending, the government does not pay a return on the investment.
Social impact financing is a fairly new concept. While examples of its implementation are relatively few, they are increasing steadily throughout the United States across a variety of programs. The focus group was presented with some examples, including details describing how New York and Massachusetts utilized the social impact financing mechanism to help fund job training and rehabilitation of former convicts as a way of reducing recidivism. By reducing recidivism rates, the states save money on their criminal justice and prison systems, and a portion of those savings are used to repay the investors.
More pertinent to the legislative proposal being considered for Pennsylvania, Salt Lake City and Chicago have utilized social impact financing to fund early childhood education programs. According to materials provided to the focus group, the Utah program provides early childhood education services to 3,500 children and the Chicago program provides early childhood education services to 2,600 at-risk children.
Make-Up of Focus Group
The leader of the discussion was Rep. Todd Stephens. The session was moderated by Lowman Henry, chairman and CEO of the Lincoln Institute of Public Opinion Research, Inc., and recorded by Erik Randolph, Erik Randolph Consulting. Staff in attendance were Brianda Freistat, Research Analyst, Majority Policy Committee; Ashley Grimm, Legal Counsel for the House Republican Caucus; Jenny P. Stanton, Executive Director, House Majority Policy Committee.
The participants were as follows:
• Anne Gingerich, Executive Director, Pennsylvania Association of Nonprofit Organizations (PANO);
• Blair Hyatt, Executive Director, Pennsylvania Head Start Association;
• Daniel Leppo, Director, Grants Management, Community Action Association of Pennsylvania;
• Caryn Long, Executive Director, Feeding PA;
• Ashlinn Masland-Sarani, Policy and Development Director, ARC of Pennsylvania;
• Britton Miller, Director of Public Policy and Civic Engagement, PANO;
• Michelle Sanchez, Director of Program Evaluation and Reporting, Maternal and Child Health Consortium of Chester County;
• Eric Saunders, Executive Director, New Hope Ministries.
The following summary is a compilation of the points made during discussion of the focus group and does not necessarily reflect the opinions of all participants.
The concept of social impact financing was generally well-received as a potential new source of funding, and the participants were interested in learning about the idea.
After an overview of the social impact financing concept, a discussion was had on the benchmarks that would need to be met in order to repay investors. There was some concern that some of the benefits that service providers provide to those in need of their services are difficult to quantify.
However, it was noted that many funders have already been requiring service providers to quantify the benefits, and as a result many non-profits have been moving toward greater quantification of the benefits of their services.
Representative Stephens and his staff explained that social impact financing programs can be used at all levels of government, including state, county and municipal governments. Any government that realizes a reduction in future costs by investments in preventative measures is able to structure a social impact financing program. Many questions from the participants focused on who would be responsible for repaying the investors in the benchmarks were achieved. Representative Stephens and his staff explained that the government who was ultimately receiving the benefit of reduced special education costs (in the early childhood education context), would be responsible for repaying the investors at the end of the program.
Social impact financing requires a significant government commitment to make it successful. The legislature is necessary to pass enabling legislation and provide for the appropriations necessary to cover the cost of the repayment if the benchmarks are achieved. The executive branch is necessary, because the agencies are administering the government programs and are contracting with service providers to provide the needed social services. In the difficult economic climate that Pennsylvania finds itself, the participants were concerned that social impact financing programs could be used as a way to divert traditional state funding away from programs to fund other areas of need rather than be used to supplement the traditional state-funding to expand the programs. Some of the participants suggested that any money saved by the government ought to be reinvested back into the same program areas and not diverted for other uses. There was also some concern about whether the government would be able to set aside a yearly appropriation in an amount that would cover the Commonwealth’s liability if the benchmarks were met under the contract and a repayment to investors was necessary. Potential solutions may include creating a mechanism to set aside the money, such as a revolving fund. These were also discussed in depth.
Discussion points included that unless the government realizes an overall drop in the demand for funding of a program, it is unclear where the money would come from to pay the investors for their return. Consider the starfish analogy, whereby throwing a starfish back into the ocean will help that particular starfish, but there are thousands of other starfish stranded on beaches. In other words, while a government program might help a select group of people, there are still many others who still need help from that same government program, thus the demand for the government program funding may not be reduced.
In response to the starfish analogy, it was stated that an independent third party evaluator would use data to verify savings specific to the definitions and terms that are set forth in a contract whereby the government would be a party to that contract. Also, if the program doesn’t achieve those specified outcomes, the risk is on the investors who would lose out and the governmental entity would not be liable to pay the return to the investors.
Besides, there are several examples today where these contracts are being implemented. Nonetheless, it is important to note that a willing government partner is a crucial component of any social impact financing arrangement.
The ability to develop the necessary metrics to make the concept work appears to be a challenge. Although some non-profits do a good job at program evaluation, many others do not. Additionally, the nature of the populations may contribute to the difficulty because the populations tend to be transient, thus, among other things, making the ability to do longitudinal metrics arduous, especially without additional funding. These concerns would again be addressed at the discretion of the investor/third party intermediary as a negotiating party.
Furthermore, some aspects of providing human services are very difficult to measure. In some cases, good metrics just do not exist. These programs may not be a good fit for social impact financing. Finally, there is a difference between priorities of human services and those aspects of human services that are conducive to measurable outcomes. Subsequently, social impact financing may not be applicable to all social programs, meaning that it may be suitable only for those areas that can be easily measured. Social impact financing bases the repayment on quantifiable measurement. If a program is unable to quantify its data, social impact financing is not the right funding model. That is why it is important to use social impact financing as a supplement to traditional state funding rather than to repay it completely.
However, as was presented, from the experience of several social impact financing deals now being implemented in the United States, representatives from those nonprofit organizations were amazed at what they could measure when an expert was brought in to help with their quantification systems. While it was significant work to upgrade those data systems, the nonprofit organizations indicated it was well worth the effort.
Additionally, the metrics for measuring program outcomes are evolving and improving with time. For example, Goldman Sachs sponsored a social impact financing deal in Salt Lake City, and it recently financed another deal in Chicago. For the subsequent deal, Goldman Sachs revised the metrics for repayment based on lessons it learned from the Salt Lake City deal. The second deal was increased by a substantial hike in investment amounts, climbing from $7 million for the first investment in Salt Lake City and secondly $17 million, in Chicago.
Bringing in private investors to fund social programs raises fascinating questions. Why is it that government often cannot make programs or assets work financially when for-profit companies using those same assets can? Is there perhaps not some other way for government to become more disciplined? While these questions were left unanswered, social impact financing may be a way to bring discipline into the system, enabling government to become quantitatively-based with measurable outcomes. And once those systems are in place, it may no longer be necessary to continue social impact financing for that specific program.
Representative Stephens introduced a co-sponsorship during the last legislative session and has spent the last seven months touring the Commonwealth to meet with social service providers, school districts, philanthropists and investors. Representative Stephens explained that it was his intention to sponsor legislation that would enable a social impact financing pilot program in early childhood education to take place in Pennsylvania. He suggested that the proposed pilot program have pilots in each of the following areas: Philadelphia, Pittsburgh, a third class city, and a rural setting to evaluate the ability to replicate social impact financing programs throughout Pennsylvania.
About the Author:
Erik Randolph is an independent researcher who specializes in evaluating government policies, programs, budgets, and legislation, quantitative analysis, and fiscal and economic modelling. As a consultant, he has provided assistance to organizations, legislators, and governments in four different states in the areas of welfare policy, budgeting, transportation policy, and criminal justice.
Erik has twenty-seven years of extensive experience in government and for seventeen years taught principles of economics for the Harrisburg Area Community College. He developed the first microeconomic model to test how welfare benefits influence behavior when he was a special assistant to the Secretary of Public Welfare for the Commonwealth of Pennsylvania, and he led a chartered team at the department to evaluate the problem of economic disincentives. Prior to his service to the department, he spent nineteen years as an analyst for the Committee on Appropriations of the Pennsylvania House of Representatives. While working for the Committee, he evaluated and forecasted costs for legislation, worked on and analyzed state budgets, handled analysis of special fund revenue and capital budgeting, researched and wrote legislation, and conducted special research projects for the chairman.
In the early part of his professional career, Erik worked in the field science and technology policy for the U.S. General Accounting Office (since renamed the Governmental Accountability Office), New York State, and the Commonwealth of Pennsylvania.
Mr. Randolph has a Master’s Degree from the College of Humanities at Rensselaer Polytechnic Institute in science and technology studies, where he concentrated on the economics and policy of science and technology. He has two Bachelor degrees from the Pennsylvania State University, one majoring in mathematics and the other in political science.