Social Impact Bonds are Wall Street’s way of supporting social change with profit incentives. Profits margins are substantially less than traditional bond investments at an average 12% return over five years. But so is the risk. Nine million dollars of capital behind an initiative to support reduced recidivism rates in the Greater Boston area isn’t a lot for an investment bank the size of Goldman Sachs or for a handsomely endowed school like Harvard Kennedy. Yet, the introduction over the last 3 years of SIBs show a steady increase in investment and in Social Impact programs.
The bonds are not ordinary “bonds” as they carry no guaranteed value unless they prove to be successful. Hence, the alternate name: Pay for Success (PFS). Basically, these bonds operate like goodwill loans to underwrite programs with the entrepreneurial goal over time of substantive positive social impact.
Former New York City Mayor Mike Bloomberg supported the very first Wall Street SIB initiative, also structured by Goldman Sachs, in 2012 with a personal guarantee of $9million to at-risk youth programs in New York City. At Good-B, we view this as the start of a growing and impactful new securities sector that has as its mission: measurable social change.
Read More- From Mass.gov:
MASSACHUSETTS LAUNCHES LANDMARK INITIATIVE TO REDUCE RECIDIVISM AMONG AT-RISK YOUTH
$27 million Initiative is Largest Financial Investment in a Pay for Success Contract in the Country!
Governor Deval Patrick announced the launch of the nation’s largest financial investment in a Pay for Success (PFS) initiative, which is designed to improve outcomes for hundreds of at-risk young men in the probation system or leaving the juvenile justice system. The Massachusetts Juvenile Justice Pay for Success Initiative will not only improve the lives of young people, but also reduce crime, promote safer and stronger communities and save taxpayer dollars.
This initiative, in partnership with Roca, Inc., Third Sector Capital Partners and commercial and philanthropic funders, is the largest PFS financial investment in the country and is designed to encourage innovative solutions to chronic social problems and improve outcomes for individuals in Massachusetts. PFS contracts allow governments with limited resources to expand innovative social programs and only pay for those that actually make a difference.
“By working with our partners at Roca, the Pay for Success initiative will allow us to marry smart financial solutions with programs proven successful in helping high-risk youth become employed, stay employed, and break the cycle of violence,” said Governor Deval Patrick.
The program will allow Roca, a nonprofit service provider, to serve 929 young men in the “greater Boston, Cambridge, Chicopee areas” by providing intensive outreach, life skills and employment training that will reduce recidivism and help these young men become assets and resources in their community.
“Pay for Success” contracts, also called Social Impact Bonds, combine nonprofit expertise, private sector funding and rigorous evaluation to transform the way government and society respond to chronic social problems. In a PFS initiative, funders assume up-front financial risk, and taxpayers pay for a program only if a third party evaluator and validator determine that the initiative has achieved specific outcomes that both create benefits to society and generate savings for government.
“The Massachusetts Pay for Success Initiative is about changing the odds,” said Molly Baldwin, founder and executive director of Roca, In. “It’s about confronting the stubborn trends of incarceration and poverty among justice-system-involved young men, and standing in solidarity to say to these young men, ‘We will not leave you behind, you deserve more than jail or prison, and we will give you our time and support to help you make a better future for yourself and your community.”
The program’s success will be determined based on reductions in the number of days young men served by Roca spend in jail, and improvements in their employment and job readiness. The Commonwealth will repay funders if Roca’s services are proven to produce positive societal outcomes and savings for the Commonwealth. To reduce incarceration rates among high-risk young men, Roca’s intervention model combines relentless outreach; intensive case management; life skills, educational, pre-vocational and employment training; and work opportunities with community partners.
Success payments will come from the Commonwealth, which has committed up to $27 million for this seven-year project, and from the U.S. Department of Labor, which awarded the Commonwealth a first-of-its-kind PFS grant of $11.7 million in September 2013. The additional funding for success payments from the Department of Labor will enable the Commonwealth to extend the project, should it prove successful, to an additional 391 young men, thereby serving a total of up to 1,320 young men over nine years.
Third Sector Capital Partners, a nonprofit advisory firm serving as project intermediary for this initiative, secured the $18 million in private financing for the project: $9 million in loan financing from the Goldman Sachs Social Impact Fund; $1.5 million in loan financing from The Kresge Foundation; $1.5 million in loan financing from Living Cities; and $6 million total in grants from Laura and John Arnold Foundation, New Profit, and The Boston Foundation. Remaining grant funds will be re-cycled into future projects at the conclusion of this initiative.
The social and financial costs related to recidivism for the Commonwealth are enormous. Currently in Massachusetts, 64 percent of young male ex-offenders reoffend within five years, and only 35 percent of these young men gain employment within a year of release. Roca’s groundbreaking approach to positive youth development aims to interrupt the cycle of recidivism by filling a gap in services for high-risk populations. Through this project, Roca will aim to reduce the number of days that young men in the program are incarcerated by 40 percent. If this goal is met, the project would generate millions of dollars in savings to the Commonwealth that fully offset the cost of delivering services.
“Pay for Success has the potential to transform how government procures some of its most important social services, and to redirect vast resources towards the social interventions that are best able to deliver the results our communities need,” said George Overholser, Third Sector Capital Partner’s CEO and Co-Founder.
“This partnership is a creative way to test new approaches to solving deeply rooted social problems,” said Secretary of Administration and Finance Glen Shor. “We are focused on government paying for demonstrated results, rather than simply the hope for success.”
“We are pleased to work with Governor Patrick, Roca and all of our partners to help high-risk youth in Massachusetts secure access to life skills training and employment opportunities,” said E. Gerald Corrigan, Managing Director and Chairman of Goldman Sachs Bank USA. “We are proud to be an investor in projects such as this that rely on public sector-private sector cooperation to better achieve social and economic public policy goals.”
“This is a promising program with the potential to improve public safety, save taxpayers money, and directly impact the lives of hundreds of young people who are at high-risk of incarceration,” Laura and John Arnold Foundation (LJAF) Vice President of Public Accountability Josh McGee explained. “Yet, the people of Massachusetts don’t have to invest millions of dollars into the program and just hope that it will work. The unique Pay for Success funding model means the Commonwealth will only pay for the program if it is proven to be successful. LJAF supports social innovation financing as part of our overall effort to promote evidence-based decision making. By rigorously evaluating programs, we are better able to determine what works and then scale those programs that actually make a difference.”
Tripp Jones, Managing Director of New Profit: “The Pay for Success approach is a promising way to mobilize critical private sector resources and ingenuity to drive greater impact in local programs, while also saving taxpayer money. It’s rare to be able to achieve both, and we are looking forward to working on this and other similar initiatives in the future.”
“While much of the attention for this project will be based on its game-changing model for addressing major social issues in a cost-effective and socially responsive way, that is but one part of the reason the Boston Foundation is supporting it. This effort also takes on a major challenge for the Commonwealth by attacking the problem of juvenile re-incarceration, using a proven model, on a scale that would have been unimaginable in traditional scenarios.”- Paul S. Grogan, President and CEO, The Boston Foundation.
“We’ve expanded our social investing footprint, we’re able to support Roca’s outstanding work in a new way and to partner with these other funders.” -Kimberlee Cornett, director of Kresge’s Social Investment Practice.
“The payoff for this transaction goes above and beyond the almost 1,000 lives we hope to positively impact. The ultimate success will be inspiring a new way for government, philanthropy and the private sector to collaborate that funds outcomes, not outputs. That’s how we’ll expand opportunities and make a dent in inequality.” Ben Hecht, President and CEO of Living Cities.
Key partners: Impact Investing
Goldman Sachs Social Impact Fund: In 2013, the Goldman Sachs Urban Investment Group (UIG) launched the Goldman Sachs Social Impact Fund, a first of its kind direct impact-investing vehicle, and manages the strategy on behalf of Goldman Sachs clients. Established in 2001, the Urban Investment Group deploys capital to help transform distressed communities into sustainable and vibrant neighborhoods of choice and opportunity. UIG seeks double bottom line returns by providing flexible financing for community projects that respond to the needs of low- and moderate-income communities and support public sector priorities.
Harvard Kennedy School Social Impact Bond Technical Assistance Lab (SIB Lab): The SIB Lab provides pro bono technical assistance to state and local governments implementing PFS contracts using Social Impact Bonds. The SIB Lab assisted Massachusetts in developing the procurement and designing the data analysis strategy for this project. Harvard Pro Bono social impact bond structuring Lab.
New Profit Inc.: Founded in 1998, New Profit is a nonprofit social innovation organization and venture philanthropy fund seeking to increase social mobility by strengthening, connecting and amplifying the best ideas across the nation. With its signature partners and a network of philanthropists, New Profit invests in a portfolio of social entrepreneurs, grows their impact, and drives systemic change in education, workforce development, public health, community development/poverty alleviation, and other levers of opportunity.
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