An Update On Pay-For-Success Contracting & Social Impact Bonds: Lessons Learned From Executives Who Are Making It Work

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An Update On Pay-For-Success Contracting & Social Impact Bonds: Lessons Learned From Executives Who Are Making It Work The 2015 OPEN MINDS Strategy & Innovation Institute Tuesday, June 16, 2015

1 An Update On Pay-For-Success Contracting & Social Impact Bonds: Lessons Learned From Executives Who Are Making It Work The 2015 OPEN MINDS Strategy & Innovation Institute Tuesday, June 16, :00pm 3:15pm Howard Shiffman, Senior Associate, OPEN MINDS York Street, Gettysburg, Pennsylvania Phone: info@openminds.com All Rights Reserved.

2 Agenda 1. What Is Pay For Success Contracting? a. Federal & State Government Support b. Early Lessons Learned 2. Lessons Learned From Initiatives Across The Country a. Tyler Jaeckel, Government Innovations Fellow, Denver Department of Finance, Office of the Deputy Mayor b. Elizabeth Gaynes, Executive Director, The Osborne Association 3. Questions/ Discussion 4. Additional Information: Examples Of Pay-For-Success/Social Impact Bonds All Rights Reserved.

3 What Is Pay For Success Contracting? It is an innovative, multi-stakeholder partnership funding mechanism that was initially launched in the United Kingdom and is now functioning in the U.S. A pay-for-success contract (aka, social impact bond) is most often a government contract (can be a private contract) for a social service purpose It is considered a pay-for-performance initiative, often involving private investment dollars to achieve specific outcomes and achieve economy of scale All Rights Reserved.

4 The Growth Of Pay-For-Success Initiatives The Harvard SIB lab estimates that in 2015 there will be more than $200 million in PFS contracts within the U.S. dedicated to projects across the country New investors have also become engaged in PFS projects, including for-profit banks such as Goldman Sachs and Community Development Financial Institutions such as the Nonprofit Finance Fund and managed care companies There has been a broad and growing interest in the field of impact investing in general as seen in local, state, and federal government involvement All Rights Reserved.

5 Federal & State Government Support

6 Federal Involvement: What Is The Social Innovation Fund (SIF)? A key White House initiative and program of the Corporation for National and Community Service The Social Innovation Fund goal is finding solutions that work for more people This program positions the federal government to be a catalyst for social impact mobilizing public and private resources to find and grow community solutions with evidence of strong results Three priority areas: economic opportunity, healthy futures, and youth development All Rights Reserved.

7 SIF Launches PFS Grants In 2014, the Social Innovation Fund launched its Pay for Success (PFS) program by funding: Technical assistance Capacity building for state and local governments and nonprofit organizations across the country seeking to better understand and implement PFS strategies The Social Innovation Fund has funded capacity building and project structuring for 43 projects across the country in more than 35 different cities and states Projects ranging from early childhood development, asthma prevention, teen pregnancy, supportive housing, homelessness, to workforce development, and recidivism All Rights Reserved.

8 SIB: Funded Organizations Intermediary Year Selected Average Annual Grant Size Years Of Funding Awarded Number Of Sub-Grantees AARP Foundation 2014 $1.0 Million 3 5 AIDS United 2010 $2.0 Million 3 13 Boston Foundation 2014 $2.7 Million 1 9 Capital Area United Way 2012 $1.0 Million 2 0 Capital Impact Partners 2011 $1.0 Million 2 10 Corporation for Supportive Housing (SIF Classic) Corporation for Supportive Housing (SIF Pay for Success) 2011 $1.2 Million $0.3 Million 3 6 Foundation for a Healthy Kentucky 2010 $1.0 Million 3 7 Green & Healthy Homes Initiative 2014 $0.3 Million 3 4 GreenLight Fund 2012 $1.0 Million All Rights Reserved.

9 SIB: Funded Organizations Intermediary Year Selected Average Annual Grant Size Years Of Funding Awarded Number Of Sub-Grantees Harvard Kennedy School Social Impact Bond Lab 2014 $0.6 Million 3 6 Institute for Child Success, Inc $0.4 Million 2 5 Jobs for the Future, Inc. Opportunity Works 2014 $2.0 Million 3 TBD Jobs for the Future, Inc. National Fund for Workforce Solutions 2010 $3.2 Million 3 21 Local Initiatives Support Corporation 2010 $4.2 Million 4 47 Mayor s Fund to Advance New York City 2010 $5.7 Million 3 16 Methodist Healthcare Ministries of South Texas, Inc $5.0 Million 2 TBD Mile High United Way 2011 $1.8 Million 2 10 Missouri Foundation for Health 2010 $1.0 Million 3 6 National Council on Crime and Delinquency 2014 $0.4 Million 2 3 New Profit Inc $5.0 Million 3 6 Nonprofit Finance Fund 2014 $1.8 Million 2 TBD All Rights Reserved.

10 SIB: Funded Organizations Intermediary Year Selected Average Annual Grant Size Years Of Funding Awarded Number Of Sub-Grantees REDF 2010 $1.5 Million 4 10 Share Our Strength 2014 $1.5 Million 1 TBD Silicon Valley Community Foundation 2014 $2.5 Million 3 TBD The Edna McConnell Clark Foundation 2010 $10.0 Million 3 9 The John A. Hartford Foundation 2012 $1.0 Million 2 5 Third Sector Capital Partners, Inc $1.0 Million 3 7 Greater Twin Cities United Way, in partnership with Generation Next 2012 $0.6 Million 2 6 U.S. Soccer Federation Foundation 2011 $1.0 Million 2 13 United Way of Greater Cincinnati 2010 $1.0 Million 3 8 United Way of Greenville County 2014 $1.0 Million 3 TBD United Way for Southeastern Michigan 2011 $2.0 Million 2 11 University of Utah Policy Innovation Lab 2014 $1.1 Million 1 6 Venture Philanthropy Partners 2010 $2.0 Million All Rights Reserved.

11 State Legislation Supporting Pay For Success/Social Impact Bonds A number of states have undertaken legislation to authorize PFS programs, including: 1. California 2. Colorado 3. Maryland 4. Massachusetts 5. New Jersey 6. New York 7. Pennsylvania 8. Rhode Island 9. Utah 10.Washington All Rights Reserved.

12 Early Lessons Learned

13 Lessons We Are Learning About PFS Not all social interventions/programs are well suited for PFS initiatives Partnering and consistent cooperation and commitment of all key players are key to implementing and maintaining a PFS program PFS arrangements should take into account the range of risks assumed by each organization involved PFS projects are in their infancy and there is not yet a body of evidence to identify the most effective model types and structures To expand commitment and investment PFS needs local, state and federal government investment Standardized processes and implementation resources would help advance the PFS field and are not yet available All Rights Reserved.

14 Tyler Jaeckel, Government Innovations Fellow, Denver Department of Finance, Office of the Deputy Mayor

15 Social Impact Bonds Catalyzing Government Innovation

SIB Lab Locations We have provided pro-bono on-the-ground technical assistance to 11 states and cities, adding 7 more with SIF funding Existing Governments Ohio Michigan

16 SIB Lab Locations We have provided pro-bono on-the-ground technical assistance to 11 states and cities, adding 7 more with SIF funding Existing Governments Ohio Michigan South Carolina Colorado Denver Chicago Illinois Connecticut Massachusetts New York New Governments Arkansas New Mexico Nevada Pennsylvania San Francisco Washington Washington DC 16

17 Pay for Success PFS financing provides additional needed funding for a government to make an important transition Pay for new programs and services while we move to long-term preventative solutions. We can add dollars to existing resources and tools to make them more effective. 100 Percentage of Budget Status Quo Needed Short-Term Funding Desired State Remedial Preventative 17

18 Overarching Motivation For SIBs We are not making rapid enough progress in solving social problems (Early Childhood Education, Recidivism, Homelessness, etc.)

19 Problems SIBS are Attempting to Address Funding for service providers is inconsistent. Solution: Private investors provide upfront capital for the duration of the contract. Given fiscal constraints, preventative programs are rarely supported. Solution: Governments pay based only on outcomes and discernible savings/benefits from those outcomes.

20 Problems SIBS are Attempting to Address We don t measure outcomes regularly enough to produce ongoing learning about what works. Solution: Independent evaluation provides the evidence needed to verify and understand program success. No systematic way for government to scale up successful innovations. Solution: Direct connection to government allows for rapid expansion of successful programs.

21 Philanthropy / Private Investment INVESTOR(S) State / City / County Intermediary / Philanthropy / Service Provider GOVERNMENT MANAGING AGENT Research Institution / Consulting Firm INDEPENDENT EVALUATOR Organization with Promising Practice SERVICE PROVIDER(S)

22 Our Collective Goal Key Pieces of Information: Current government costs (by gov. source) Value of any related benefits Historic baselines Key Pieces of Information: Cost of services Availability of housing Additional funding resources Key Pieces of Information: Historic provider performance National studies of success 22

23 NYS PFS Example 23

24 Investment Structures 24

25 How do we get there? As governments, our most important step is analyzing whether or not a PFS model is feasible for our desired intervention/population. Defining the Specific Population of Interest Analyzing Current Costs and/or Potential Benefits Projecting Potential Success & Savings What is the target geography? Or, what is the required geography needed to serve the desired amount of individuals? How many individuals are available to be served? Do you need to identify a targeted high-cost sub-population? What characteristics allow you to identify and target your desired population? What are the current baselines of the target population? How confident are you in them? What are the disaggregate costs of the population by level of government or other entity (i.e. federal, state, local or managed care organizations)? What is the value of benefits you may be willing to consider paying for? What are the current baselines of the target population? How confident are you in them? What are the disaggregate costs of the population by level of government or other entity (i.e. federal, state, local or managed care organizations)? What is the value of benefits you may be willing to consider paying for? 25

Example: Denver High Utilizers may have high and low years, but they have high multi-year averages (Target group = those who spent more than 7 days in

26 Example: Denver High Utilizers may have high and low years, but they have high multi-year averages (Target group = those who spent more than 7 days in jail in 2010) 2010 Target Group Average Total Bookings Yearly Average Bookings 2.7 Average Total Jail Days 170 Yearly Average Jail Days 57 26

27 Getting to Current Costs 27

28 Denver Project Details Project Goals: 1) Demonstrate that housing and intensive case management can improve lives and reduce taxpayer costs. 2) Add to the City s capacity to house vulnerable populations. 3) Develop new mechanisms and funding to pay for case management services that formerly received federal support. Size: 250 to 300 chronically homeless individuals Duration: 5 to 6 years of SIB funding Services: 2-3 new Assertive Community Treatment teams (ratio of ~ 1 case manager to 10 individuals) Connection to preventative health Housing Details: Two new housing developments with an anticipated 160 new units of housing (one MHCD building, one CCH building). Provision of additional services and subsidies to new units that are coming online or units that are vacant through turnover. 28

SIB Project Concept The SIB Project is an

housing and demonstrate the benefits of combining

Funding Strategy Funding Pre-SIB Need Outcome

component Non Medicaid eligible component Enhanced

capital costs of preparing housing for program

support 90%, State 10% Get as much of program into

assistance CHFA, DOH, City and private lenders for

likely program and rental support gap by capturing

29 SIB Project Concept The SIB Project is an opportunity to add new resources to supportive housing and demonstrate the benefits of combining multiple existing sources of funding Pre SIB Funding Strategy Funding Pre-SIB Need Outcome Elements Funding Services Housing Medicaid eligible component Non Medicaid eligible component Enhanced Rental assistance or operating subsidy Upfront capital costs of preparing housing for program participants Medicaid expansion allows fed gov t to support 90%, State 10% Get as much of program into Medicaid as possible DHA, CoC, DOH for rental assistance CHFA, DOH, City and private lenders for housing capital Social Impact Bond that addresses likely program and rental support gap by capturing jail and health savings Integrated delivery of services and housing for target population 29

30 Elizabeth Gaynes, Executive Director, The Osborne Association

31 1 NYC SIB ABLE UPDATE MAY 5, 2015 mdrc BUILDING KNOWLEDGE TO IMPROVE SOCIAL POLICY

32 What is a Social Impact Bond (SIB)? 32 Investors finance a program Non profit service providers operate the program Government agrees to pay back investors if specific predetermined outcomes (ideally impacts) are achieved Government pays nothing if desired outcomes/impacts are not achieved Independent evaluation determines payment

33 The Policy Context: Reducing Recidivism 33 Individuals who enter the City jail system as adolescents (16- to 18- year-olds) have a high likelihood of reentering the system as adults. Nearly half of all youth in custody will return within one year of their initial release. The typical adolescent who passes through Rikers will spend more than 200 days in jail during the next six years (in addition to the current stay), an average of 34 days in jail each year. Criminal justice involvement has a highly corrosive impact on individuals, families, and communities. The high rate of incarceration among low-income, minority youth is particularly troubling. In 2011, Mayor Bloomberg launched the Young Men s Initiative, a cross-agency enterprise that seeks to address disparities between young black and Latino men and their peers by investing millions of dollars in programs and policies that support this mission. Incarceration is extremely costly to government and taxpayers. The City of New York spends more than $1 billion a year on jails. The average operating cost per inmate is more than $85,000 per year.

34 ABLE Partners 34 City of New York - Government Partner (DOC & DM of HHS) MDRC SIB Intermediary Goldman Sachs Private Investor ($9.6 million) Bloomberg Philanthropies Loan Guarantor ($7.2 million) The Osborne Association NFP Service Provider Friends of Island Academy NFP Service Provider Vera Institute of Justice Independent Program Evaluator

35 35 ABLE Partnership Structure

36 Requirements for Success 36 Program makes a positive difference + Program serves a minimum # of participants + Program operates for 6 Years = City saves money and investors make money

37 ABLE Payment Terms 37 If Goals Are Met: MDRC will receive a payment from the City, which is used to reimburse Goldman Sachs for the initial loan plus a return on investment. MDRC will work with Bloomberg Philanthropies to reprogram the $7.2 million for future efforts. If Goals Are Not Met: MDRC will use Bloomberg Philanthropies $7.2 million to repay Goldman Sachs.

38 Payment Terms by Impact Profits and Losses Are Both Capped 38 Impact on Recidivism Rate DOC Payment Private Investment Investor Profit Net Projected Taxpayer Savings* 20.0% $11,712,000 $9,600,000 $2,112,000 $ 20,500, % $10,944,000 $9,600,000 $1,344,000 $ 11,700, % $10,368,000 $9,600,000 $768,000 $ 7,200, % $10,272,000 $9,600,000 $672,000 $ 6,400, % $10,176,000 $9,600,000 $576,000 $ 5,600, % $10,080,000 $9,600,000 $480,000 $ 1,700, % $9,600,000 $9,600,000 $0 < $1,000, % $4,800,000 $9,600,000 -$4,800,000 < $1,000,000 * Excludes city savings used to continue funding program delivery at Rikers.

39 NYC SIB: Intervention 39 Cognitive Behavioral Therapy (CBT) Distorted thinking can lead to criminal behavior CBT restructures thinking to change behavior CBT programs improve social skills, problem solving, moral reasoning, self-control, and impulse management CBTs have been evaluated extensively and have been found to reduce arrests, convictions and incarcerations among adults and youth

40 The Intervention 40 Moral Reconation Therapy (MRT) MRT was developed by Correctional Counseling Inc. in 1985, and has been widely and successfully implemented in prisons, jails, drug courts, probation offices, and schools MRT has been used with adults and adolescents alike MRT addresses beliefs and moral reasoning by taking participants through a12-step curriculum that is self-paced and workbook based

41 The Intervention 41 Why Moral Reconation Therapy (MRT)? Aligns with environment at Rikers: high turnover rate, high number of participants to serve o Inmates have great variability in length of stay o MRT can be incorporated into the school day Open groups o Inmates are moved frequently o Participants can enter a group at any time Flexibility o Participants can move through the program at their own pace

42 Successes 42 Program serves vast majority of adolescents in jail Original targets assumed 80 percent of the DOC adolescents would be served Program serves approximately 80 percent of the adolescents in the jail Participants are progressing as intended Original theory of action had just over half of participants reach step 3 and approximately 30 percent complete the program (reach step 12) Program is exceeding the target for step 3 and is meeting 73 percent of the completion (step 12) target As a result, we still expect to see reductions in future rates of incarceration greater than 10 percent (based on Lipsey meta-analysis results that drove the original theory of action) Fewer youth are spending time in jail (cause is unclear) The number of youth who stay in jail more than 6 days has gone from 2,958 in 2010 to 2,071 in 2013 (a 30 percent reduction)

43 2014 Challenges 43 Adolescent jail population was too low to meet contractual requirements Participation to date has been below contractual requirements Year 1 (Sept 2012 through Aug 2013) program served 1,825 which exceeded the target of 1,440 (this target was low due to four months of operation at half scale) Year 2 (Sept 2013 to Aug 2014), program served 1,876 (75 percent of the original 2,500) Program has served 94 percent of the target to date (3,701 out of 3,940) When the program started the contractual minimums required that the program serve 68 percent of the eligible youth expected to be in the jail (2,500 out of 3,700 annually) Those same minimums now require the program to serve 120 percent of years olds expected to be in jail (2,500 out of 2,071) Youth take longer to participate than expected, reducing the eligible pool from 3,700 to less than 3,000 Eligible population has declined by 37 percent from 2,958 to 1,868 since 2010

44 44 Declining Population Made Achieving Original Targets Impossible 4000 Original Estimates Adjusted for Length of Stay Actual ABLE-Eligible Population Program Year 2 and 3 Target Original Annual ABLE- Eligible Population Estimate 80% of Estimated ABLE-Eligible Population Adjusted ABLE-Eligible Population Estimate Including only Youth in Custody for more than 6 Days 80% of Adjusted ABLE- Eligible Population ABLE-Eligible Population in DOC Custody Program Year 2 (FY 2014) Projected ABLE-Eligible Population in DOC Custody Program Year 3 (FY 2015) 0

45 2014 Programming Changes 45 Program expanded to year olds in September 2014 Added GRVC and GMDC Program added facilitation staff to expand to additional facilities. Modification has been approved to the contract that will include new targets based on new population being served.

46 New Participation Targets 46 Program Year Participation Requirements 1 80% of year olds made available to the ABLE program 2 80% of year olds made available to the ABLE program 3 80% of year olds made available to the ABLE program 26% of year olds made available to the ABLE program beginning only when the Board of Correction has fully approved the creation of young adult housing and DOC is actively operating such a facility. 4 80% of year olds made available to the ABLE program 26% of year olds made available to the ABLE program as of the beginning of the program year if the Board of Correction has fully approved the creation of young adult housing and DOC is actively operating such a facility or beginning when the Board of Correction has fully approved the creation of young adult housing and DOC is actively operating such a facility.

47 2015 Timeline 47 May Vera releases preliminary findings to project partners. June Partners meet to make decision If evaluation reveals that program has achieved Year 3 9.0% impact hurdle, funding for the program continues If evaluation reveals that program has NOT achieved Year 3 9.0% impact hurdle, funding for the program in jeopardy July Public release of findings

48 Questions & Discussion

49 Additional Information: Examples Of Pay-ForSuccess/Social Impact Bonds

50 London s Peterborough Social Impact Bond The first PFS project launched at the Peterborough Prison (North of London, U.K.) in September 2010 and continues through 2016 The goal of the Peterborough SIB is to reduce recidivism among approximately 3,000 short-term incarcerated young men All Rights Reserved.

51 The New York City ABLE Project For Incarcerated Youth Lead organization: City of New York Intermediary: MDRC Service provider: Osborne Association and Friends of Island Academy Focus area: juvenile justice (3,400 high-risk minority young men at-risk for re-incarceration) Service location: Rikers Island Jail (NY) Target outcome: reduction in rates of recidivism Contract execution date: August 2012 Investment amount: $9.6 million All Rights Reserved.

52 New York Increasing Employment & Improving Public Safety Pay-For-Success Project Lead Organization: New York State Department of Labor Intermediary: Social Finance, Inc. Service Provider: Center for Employment Opportunities (CEO) Focus Area: Formerly incarcerated men (2,000 recently released prisoners at-risk for recidivism) Service Location: New York City and Rochester (NY) Target Outcomes: (a) Employment gains; (b) bed days avoided Contract Execution Date: December 2013 Investment Amount: $13.5 million All Rights Reserved.

53 Utah Pre-K Project Lead Organization: State of Utah Intermediary: United Way of Salt Lake Service Provider: Six organizations, including public school districts and private educational providers Focus Area: Early childhood education Service Location: Park City School District and Granite School District, Utah Target Outcomes: Avoidance of special education or remedial education services Contract Execution Date: June 2013 Investment Amount: $6.8 million All Rights Reserved.

54 Massachusetts Juvenile Justice PFS Initiative Lead Organization: Executive Office for Administration and Finance, Commonwealth of Massachusetts Intermediary: Third Sector Capital Partners, Inc. Service Provider: Roca, Inc. Focus Area: Juvenile justice (between 929 and 1,320 young men at-risk for recidivism) Service Locations: Areas surrounding Chelsea, Springfield, and Boston (MA) Target Outcomes: (a) Employment gains; (b) bed days avoided Contract Execution Date: January 2014 Investment Amount: $21.3 million All Rights Reserved.

55 Chicago s Child-Parent Center Pay-For-Success Initiative/SIB Lead Organization: City of Chicago Intermediary: Metropolitan Family Services Service Provider: Chicago Public School District Focus Area: Early childhood education Service Location: Chicago (IL) Target Outcomes: (a) Reduction in need for special education classes in schools; (b) increased third grade literacy rate Contract Execution Date: October 2014 Investment Amount: $16.6 million All Rights Reserved.

56 Cuyahoga County Partnering for Family Success Program Lead Organization: Cuyahoga County Division of Children and Family Services Intermediary: Enterprise Community Partners, Inc. Service Provider: Frontline Services Focus Area: Homelessness and child welfare Service Location: Cuyahoga County (OH) Target Outcomes: Reduction in out-of-home foster care placement Contract Execution Date: December 2014 Investment Amount: $4.0 million All Rights Reserved.

57 Chronic Care Management Disability Supports & Long-Term Care Mental Health Services Addiction Treatment Social Services Intellectual & Developmental Disability Supports Child & Family Services Juvenile Justice Adult Corrections Health Care York Street, Gettysburg, Pennsylvania Phone: info@openminds.com

Social Impact Bonds 101

Social Impact Bonds 101 I. Introduction As of February 2017, 15 Pay for Success (PFS) contracts using social impact bonds (SIBs) have been launched in the U.S. In combination, these projects are scheduled