Social Impact Bonds: Restructuring Finances for Programs that Work Social Economy Working Group Briefing April 25, 2013
The Children’s Agenda Mission: improve the health, education and success of our community’s children and youth, especially the most vulnerable, through advocacy for evidence-based solutions and policy change at the local, state and federal levels. Founding principles: Community Foundation, United Way, local funders and children’s service providers built TCA in 2004 to fill a vacuum for three needed, missing ingredients in community: • Advocacy: strictly focused, nonpartisan, un-self-interested • Evidence-based: “What’s needed most and works best” based on data • Independent: no affiliation or funding from government or children’s service providers
A Decade of Decline • 25% of Monroe County’s children live in poverty; 15.1% live in concentrated poverty, meaning more than 30% of their neighbors also living in poverty. • Reports of child abuse and neglect have increased by 23% from 2003 - 2011. • Monroe County’s infant mortality rate is behind that of most industrialized nations and the U.S. national rate. • In Monroe County, 47% fewer kids & working families receive child care subsidies since 2001.
Kids’ problems are mostly preventable: choices we make, not fate
Principles for Effecting Change for Kids • These are choices, not fate • Ten years gone by – that’s a generation • What we’re doing today isn’t working sufficiently • Don’t waste money (Scared Straight, DARE) • Leave short-term, reactive thinking & spending Change = Two-Tracks: • Incremental, by scaling evidence-based programs • Transformational, with innovative policies
What’s the Difference? One Example: For 800 Families in NFP • 110 fewer children will be hospitalized for injuries; • 2 fewer children will die; • 60 fewer expectant mothers will suffer from pregnancy-complications; • 90 fewer instances of repeat unplanned pregnancies will occur; • 90 fewer children will develop language delays; • 150 fewer children will suffer child abuse and neglect.
Track #2 Big Ideas for Little Kids: Policies to Transform the Next Decade • Permanence: Institutionalizes new “rules of the game” rather than programs or policies that fluctuate based on the leaders and money available at the time • Lift all boats: Improves the entire continuum of children’s needs and services, not just single programs or areas • Every Child Belongs to Each of Us: Elevates the priority level and responsibility for kids’ problems & solutions to the whole community, not just as the purview of a few service providers, nonprofits, etc.
Track #2: Transformational Policy ChangesBig Ideas for Little Kids • Children’s Impact Statement • Youth Master Plan • Annual “State of the Children” Report Card and Address • Evidence-Based Contract Review • Restructuring Financing of Children’s Services
Restructure Financing of Children’s Services Problem: growing service needs, shrinking public budgets, even for cost-saving prevention + Political barriers to long-term investments in kids Solution: If government can’t do what it should do, new asset class that uses back-end public savings to attract front-end private investments + Promotes use of evidence, performance measures, and quality improvement in services
Funding for Social Services Today • Government grants: federal, state, county, city 2. Fees for services 3. Philanthropy: foundations, individuals, business
So What’s Wrong with That? • Long-term fixes rely on short-term funding: unreliable, insecure, fickle commitments • Patchwork funding deters scale-up & sustainability • Organizations typically rewarded for the “tried and true” or else newfangled idea that catches a funder’s whim • Typically measure activities not outcomes • Competitive disadvantage: remediation/preventive • Separate worlds of mutual disdain: private sector not engaged
Problems with Government Funding What & How it Should Fund • Vicious cycle: increasing demands placed on shrinking public sector budgets • Funding decisions based on most powerful political players, not necessarily most effective programs or most rational synergy between • Upfront costs are immediate and obvious but social benefits are long-term & diffuse • Public officials’ risks/rewards geared for 2 or 4 years; Doesn’t match pay-off period of benefits
PUBLIC POLICY TRAILS WHAT’S NEEDED MOST, WORKS BEST & COSTS LEAST Brain growth versus public expenditures on children ages 0-18 Source: Rand Corporation Rand Corporation 90% of public expenditures occur after age five, after up to 90% of brain development has occurred.
The Key Question Can we generate economic value by creating social good? Micro-lending, now a multi-billion dollar asset class, is one example of a financial instrument pointing to the possibilities of refinancing social good.
Social Impact Bonds, orPay-for-Success Contracts Social impact bonds scale-up nonprofit programs that improve lives while reducing the cost of government programs. Government commits to using a proportion of the savings achieved on the back-end to reward non-government investors who finance the prevention services on the front-end. This financial product makes investor return contingent upon the service provider achieving the specified outcomes.
An Ounce of Prevention. . . “Every dollar invested in high quality early education returns between $7 and $17 because of tax savings from reduced services needed for these children as they grow.” James Heckman University of Chicago Economist Nobel Laureate
Worth Pound After Pound. . . • “Economically speaking, early childhood programs are a good investment, with inflation-adjusted annual rates of return on the funds dedicated to these programs estimated to reach 10 percent or higher.” ~ Federal Reserve Chairman Ben Bernanke, July 2012 • Fully funding early learning in New York would generate $1.86 in additional sales for every dollar invested; Creates new jobs; Reduces the millions of dollars businesses lose from absenteeism caused by employees' child care problems. ~ America’s Edge Report, August 2010
Is This Real Money? One Example: Early Child Care • Special-ed assignment without preschool: 18% (PA data) • Special-ed assignment with preschool: 7.5% (PA data, conservative estimate) • Cost of preschool center-based high quality care per child per year: $10 - $12,000 (Monroe County av., 2013, TCA) • Cost of special-ed per child per year: $26,550 (NYS average, 2012) • Cost of general education per child per year: $11,000 (NYS average, 2012)
Yes, The Money Is Real According to a study conducted by the Kauffman Foundation and ReadyNation, “Because special education service costs are quite high relative to preschool costs, the benefits appear to be largely attractive. They also appear to be monetizable within 36 to 48 months.”
Monetizing Savings NYS Early Childhood Advisory Council: “By improving the quality of 500 early childhood education programs that serve over 50,000 children each year, we could potentially reduce the rate at which these children are placed in special education during elementary school by 15%. At this level of impact, by the fourth year of the initiative, there will be a total of 2,206 fewer special education students in these districts, accumulating a cost savings of almost $7 million by the second year of the initiative, increasing to a cost savings of more than $34 million in year four, for a cumulative savings of $57.7 million in special education costs.”
Who In Their Right Mind Would Risk Money Like This? Goldman Sachs for One.
Rate of Return on the 4-Year Deal Approx. 5% • Goldman’s $9.6 million investment is carefully cushioned on either end. • Down-side: Bloomberg Foundation has agreed to issue a 75% credit guarantee, limiting Goldman’s potential loss to $2.4 million. • Up-side: The payout is capped to $2.1 million – so if recidivism drops by more than 10%, NYC government accrues even more savings.
Recent Developments • International: First developed in UK for Peterborough Prison pilot, September 2010. Now Canada, Australia, and EU developing their own, new versions of this instrument. • Domestic: Goldman Sachs-NYC first social impact bond in US, August 2012 around 16 – 18 year old Rikers ex-inmates • Federal: DOJ awarded two Pay for Success projects in 2012. DOL supporting job training programs in 2013. 2014 Obama budget proposal includes $195 million in direct support, plus $300 million incentive fund to help state & local governments implement programs with philanthropies. • NYS: 2013 budget includes $30 million for initiatives over 5 years in early childhood development and child welfare, health care or public safety, April 2013.
In Summary, Why Social Impact Bonds? 1. Encourage innovative solutions to social problems; can even be at local and private initiative. • Government pays only if program delivers on promised impact. • Shifts risk of failure (and wasting taxpayer dollars on programs that don’t work) to private sector risk/reward experts. • Can break down budget silos hindering investment in prevention. 2. Improve performance. • Focuses government agencies and social service providers on achieving outcomes and improving performance in a way that is transparent to taxpayers. 3. More rapid scale-up of what works / descaling what doesn’t. • Ongoing measurement of a program’s impact is a fundamental component of this approach. Privileges what’s evidence-based. • 3