States seek private financial help to fix social problems

HARTFORD, Conn. – A growing number of states and local governments are turning to an unconventional method of financing possible fixes to big social problems, motivated by tight budgets and little incentive to take a chance on initiatives without a guarantee of results.

On Tuesday, officials in Connecticut, South Carolina and Colorado announced new public and private arrangements to fund so-called “pay for success” projects that aim to help families struggling with drug addiction, improve health outcomes for poor mothers and their children and reduce chronic homelessness.

The concept, often referred to as “social impact bonds,” involves a government entity teaming up with a private intermediary that develops the project, identifies effective programs already being used and raises the capital from philanthropic-minded investors. If the initiative produces specific results over multiple years, then the state or local government pays back the investment with a small rate of return. But if the project doesn’t meet those results, the taxpayers typically are not on the hook financially.

“It’s critically important in this time, when, as our governor has said many times, we’re facing a new reality – a new reality of budget restrictions, but the same if not growing challenges in our communities and the need to invest even more,” said Hartford, Connecticut, Mayor Luke Bronin, at last week’s announcement of the “Connecticut Family Stability Pay for Success Project.”

The 4 1/2-year, $11.5 million initiative will fund teams of two clinicians and a family support worker that will make in-home visits several times each week to families struggling with drug abuse. Up to 500 families involved with the state’s Department of Children and Families, with children age 6 and younger, will be targeted for the services which stress positive parent-child interactions.

Social Finance, a Boston-based, nonprofit organization, will raise the money needed for the initiative. The group’s sister organization, Social Finance UK, was founded in 2007 and launched the first social impact bond in 2010. The U.S. program was founded in 2011 and has been identifying programs that can help fix social problems, looking at best practices on how to affect change and securing funding to get it done.

If the program meets specific goals, such as reducing the likelihood of children being removed from the home due to abuse and neglect, then the group’s financial backers – typically foundations, wealthy individuals and institutional investors – will get their principal back with interest, enabling them to reinvest in other projects.

If those benchmarks aren’t reached, the Social Finance investors will pick up the tab.

The concept of such “pay for success” projects is relatively new, beginning about five years ago in the United Kingdom. There are several programs underway in the U.S. and more in development. Projects in Colorado, Massachusetts, California and Ohio deal with homelessness issues, while other projects in Illinois and Utah address early childhood education. A second Massachusetts project tries to address recidivism among young male inmates.

In Denver, there was some skepticism voiced about using private financing to help provide permanent housing and supportive services to at least 250 chronically homeless individuals. One City Council member raised concerns that it could ultimately cost more money than if Denver contracted with providers on its own.