By Nat Hoopes
For years, the American people on both sides of the political aisle have argued that Washington should be more discerning in how taxpayer dollars are spent. Providing the necessary funding for social programs that really work, while reforming or jettisoning or those that may be less successful (or even counter-productive) in addressing societal problems has been extremely difficult to do. The federal government’s 47 overlapping job-training programs across nine agencies is just one example of Washington’s good intentions run amok.
With Republicans in control of both the House and the Senate for the first time since 2006, and President Barack Obama in the final two years of his presidency, there may be a chance to break through the gridlock, just as former President Bill Clinton and a Republican Congress did on welfare reform almost 20 years ago. One promising area for possible bipartisan collaboration lies in the so-called “pay for success” model for addressing social problems. Under “pay for success,” government’s contribution and impact is not measured just in the dollars spent but in lives actually improved. Institutions such as Goldman Sachs, Bank of America-Merrill Lynch, BNY Mellon, Morgan Stanley, JPMorgan Chase and others have worked with state and local governments to pioneer and explore these products, which are often known as social impact bonds or investments. New York Times columnist David Brooks recently wrote about how this type of investment is now entering the mainstream and is a promising tool to address social problems.
According to recent reporting from the Wall Street Journal, it appears House Ways and Means Chairman Paul Ryan (R-WI) and others may be interested in bringing these private sector innovations to the national level in Washington. The progressive think tank The Center for American Progress has also written positively about the promise of these types of instruments and their relevance for policy makers.
So what exactly is “pay for success,” and how do “social impact bonds” really work? These are new, innovative financial products, pioneered in many cases by Forum member companies, that work to address societal problems such as recidivism, financing of early childhood education, and environmental sustainability.
A promising example of “pay for success” budgeting has been in addressing the stubborn issue of prisoner recidivism. The government (read: taxpayers) could save a lot of money over a future time horizon if fewer former convicts ended up back behind bars. There are social service organizations such as Roca that have shown an ability to use interventions with recently released prisoners that make it far less likely that they will end up back in jail. These organizations need up-front funds to achieve greater scale. Issuing a social impact bond to investors enables those organizations to receive funds that they need up front to reach out to more ex-prisoners. The government then “pays for success” at a later point only if the lower incarceration rates for ex-cons actually materialize, saving taxpayers’ money. National Journal has recently reported that the results of these types of programs have been positive thus far.
Job training is another area that might be ripe for a “pay for success” revolution. Language in the recent Workforce Innovation and Opportunity Act, championed by Representative Susan Brooks (R-IN) and Senator Rob Portman (R-OH), allows state Governors to use as much as 10% of their federal job training funds for these types of pay-for-performance, outcome-based programs. During the last Congress, Representatives Todd Young (R-IN) and John Delaney (D-MD) introduced H.R. 4885, the Social Impact Bond Act, where the federal government would seek proposals from states or local governments for social impact bond projects which produce measurable, clearly defined outcomes that result in a social benefit. This bill, though just introduced, has bipartisan support and could bring more attention to social impact bonds and “pay for success” models.
There are other opportunities for innovative bipartisan compromises that would improve the lives of American citizens. The disability portion of Social Security (SSDI) will begin to run a shortfall in 2016, leading to a mandated 20% cut for all disability recipients. Former House Ways and Means Social Security Subcommittee Chairmen Earl Pomeroy (D-ND) and Jim McCrery (R-LA) have launched an effort to educate the public and are floating ideas to reform SSDI that would boost program integrity and create greater job opportunities and pathways for those disabled citizens who are still capable of working. If these reforms end up working to improve self-reliance and reduce dependence on the program, that would indicate that SSDI could be ripe for a pilot “pay for success” program.
Overall, there has been a massive uptick of interest in “impact investing” and in sustainable and responsible investing, an investment discipline that considers environmental, social and governance (ESG) issues in the investment process. The newly released Report on US Sustainable, Responsible and Impact Investing (SRI) Trends 2014 from the US SIF Foundation shows that SRI has experienced double-digit growth over the last two years. According to 2013 year-end estimates, SRI totaled $6.57 trillion, or more than one out of every six dollars under professional management in the United States.
Increasingly, investors are looking to put their dollars to work in ways that net a social as well as a financial return, and the financial sector is innovating to help them achieve those goals. Many believe that Washington is hopelessly gridlocked and unable to address our country’s problems. But each election and every new Congress offers a chance to start anew and bipartisan legislative victories can sometimes appear when they are least expected. “Pay-for-success” may be one avenue that that opens the way to meaningful legislative achievement.