Social Impact Bonds, Hot New Experiment

Both House and Senate bills have been introduced this summer to fund a model called “Social Impact Bonds.” The two bills (HR 4885 and S 2691) are bipartisan and they attempt to expand the use of a funding strategy that would attract private investment to address a social problem or challenge with investors rewarded with a pay-back by government only if specific outcomes and goals are reached over time.

HR 4885 was introduced in June by Congressman Todd Young (R-IN) with 22 cosponsors with the sponsorship split down the middle between the two parties—a rarity in recent congresses. S 2691 was introduced by Senator Michael Bennet (D-CO) and Senator Orin Hatch (R-UT) just before the August break. The House bill is called the Social Impact Bond Act while the Senate bill is called the Pay for Performance Act. Both bills amend the Social Services Block Grant (SSBG) by adding a subsection C with $300 million designated in the subsection but the funds are not necessarily drawn from SSBG (they do not alter the $1.7 billion for the base block grant).

The state or local governments could apply for funding. The general structure is that a non-governmental entity or agency would attract funding from non-profit and for-profit sources to address a specific social challenge. In England a project near London has become one of the earliest tests of the strategy by targeted recidivism rates among inmates exiting prison. If the agency/entity reaches the set outcome, for example a ten percent reduction in recidivism rates over a specific period of time investors would receive their investment with interest back with the government held harmless if the outcomes are not met.

Over the past few years the Center for American Progress has examined the strategy and issued reports including Investing for Success and also hosted a roundtable on the challenges and issues with such strategies. They have also created a factsheet on some of these “pay for performance” approaches to addressing social human service challenges.

The two bills are somewhat different in their structure with the House bill including 13 types of projects that would be eligible for funding and the Senate bill including 14 categories of projects. The common projects in both bills include:

Projects that can qualify:
• Increasing work and earnings by individuals who have been unemployed for more than six consecutive months;
• Increasing employment and earnings of individuals age 16 to 24;
• Increasing employment among individuals receiving Federal disability benefits;
• Reducing the dependence of low-income families on Federal means-tested benefits;
• Improving rates of high school graduation;
• Reducing teen and unplanned pregnancies;
• Improving birth outcomes among low-income families and individuals;
• Reducing rates of asthma, diabetes, or other preventable diseases among low-income families and individuals;
• Increasing the proportion of children living in two-parent families;
• Reducing incidences of child abuse and neglect;
• Reducing recidivism among individuals released from prison; and
• Other measurable outcomes defined by the State or local government that result in positive social outcomes and federal savings.

The House also includes
• Increasing adoptions of children from foster care
While the Senate specifies:
• Reducing the number of youth in foster care who are emancipated from care by increasing adoptions, permanent guardianship arrangements, reunification, or placement with a fit and willing relative for children and youth in foster care; and
• Reducing the number of children and youth in foster care residing in group homes, child care institutions, agency-operated foster homes, or other non-family foster homes, unless it is determined that it is in the interest of the child’s long-term health, safety, or psychological well-being to not be placed in a family foster home.

The Administration has also proposed in recent budgets $300 million in pay for success funding. In fact the former head of the White House Domestic Policy Council under President Obama, Melody Barnes issued a statement at the introduction of the Senate bill that said, “The Pay for Performance Act gives policymakers a critical, evidence-based strategy for dealing with major societal challenges. By connecting the tools of impact investing to a ‘what works’ approach, this bill takes us one step closer to a smarter, leaner, results focused government.”