Social Impact Bond Memorandum Re: Implementation of Social Impact Bond Strategy Date: July 29, 2014

Executive Summary This memo provides an overview of social impact bonds (SIBs) and an assessment of their relevance to non-profit organizations. The memo begins with a brief background on SIBs, including where they have been tried and results known to date. It concludes with assessments of their potential applicability to non-profits either as an investor, private sector financing intermediary, or a service provider. Background What they are: A Social impact bond is regarded as a performance-based investment bond. What makes a SIB different from other bond types is that it does not offer a fixed return and operates over a set period of time. They also feature a high risk of investment to the outside investors willing to fund the project. Due to this high investment risk, SIBs have often been compared to an equity investment or structured product for similar terms of risk. Social impact bonds offer an opportunity to improve social outcomes by providing an alternative source of funding to public programs. SIBs are an alternative because they provide a means of conditional funding if the desired outcome is achieved, rather than traditional financial methods that measure simply inputs and outputs. Who initiates: SIBs work through a legal contract between a government agency and a private sector financing intermediary or external organization. By providing an in-depth scope and comprehensive analysis as to why the external organization would like to conduct an intervention, the external organization initiates the proposal of a SIB to a government agency, which the agency then suggests the set timeframe, payment level, and desired outcome. Once the “Pay for Success” contract has been approved and signed, the external organization takes the responsibility to form secondary contracts with outside investors and service providers. If the outcome is achieved, outside investors will be rewarded with a return according to the level of program performance, but they assume 100% of the risk. Service providers carry out the intervention and are overseen by the external organization. Purpose: A private sector financing intermediary is given the opportunity to intervene and discontinue a government-funded service if proven ineffective. The external organization would also need to produce evidence as to how their intervention will result in a more effective outcome compared to a previous service. SIBs support the intervention of preventative services rather than remedial because remedial services require high levels of funding and attention. Areas of focus for private intervention include recidivism, homelessness, employment, youth violence, preventative healthcare, childhood education, and teenage pregnancy.

The first SIB was launched in 2010 by Social Finance based in Peterborough, England, which concentrated on reducing recidivism rates among inmates. Since then, the £5m project has come to reveal promising results as recidivism rates have fallen by 11%, while national rates increased by 10%. Though the intervention is proving to be effective, the government has chosen to cancel the pilot and enact its “Transforming Rehabilitation programme”, leaving private contractors responsible for the management of rehabilitation services in 21 parts of the UK. From this evidence, we can assess that SIBs are beneficial, but only if the government is in compliance. Due to the tight connection between SIBs and the government budget, policy shifts may be the downfall for the promising financial tool. If the government doesn’t take a share of the investment risk, outside investors will lose interest in such a model. With this in mind, SIBs are still in the developmental stage, so most current SIBs may not reveal anticipated outcomes due to unexpected events. Though the “Pay for Results” method is regarded as a beneficial financial tool, it is still unproven as an efficient alternative to traditional upfront payment methods. Most existing SIBs require a 100% risk on investment, due to the government’s ability to pay at the conclusion of the contract rather than payment upfront. SIBs rely on a network of stakeholders that will be reviewed in more detail later. SIBs offer two benefits from standard government programs:

Increases public sector savings by using resources more efficiently.

Improves services for disadvantaged populations.

Applicability of SIBs to a Non-Profits context Social impact bonds offer a new financial method, of which, different government agencies provide funding for selected service programs that deliver reputable outcomes from their social performance. These SIBs have the potential to relive the government from paying for ineffective social services by turning to private investors, who will initially take on the financial burden of funding the approved program. A major component of this new financial mechanism, as opposed to previous models, is that payment by the government is not upfront, but rather at the conclusion of the contract when all outcomes have been accomplished. Due to the beneficial nature of the SIB, the structure of the model incorporates many organizations and various streams of funding which has been proven to reduce the amount of government financing for specific social interventions. The first step in the SIB model begins with a mandate set forth by a government agency, which involves a deliverable outcome, set timeframe, and payment level for an external organization that is capable of providing a comprehensive plan to meet these objectives. By accepting the government’s contract of conducting a social intervention, the external organization or private sector financing intermediary will go forth with the program to meet the specified objectives. However, SIBs prevent the government agency from contracting with an external organization if there is a lack of scope and measurable outcome. With this being said, the government’s role involves the responsibility of hiring an external organization to carry out the SIB in an effort to reduce the government’s previous financial obligation of funding preventative social services.

After the terms of the contract have been prescribed, the private sector financing intermediary assumes the responsibilities of seeking out sources of funding and the hiring of service providers. In sense, the SIB gives the contracted external organization control over the whole operation in order for the set outcomes to be met. Because the external organization assumes a high-risk agreement, the arranged level of return from the government will be high, therefore outside investors may look to provide the working capital for the program at a chance to receive a high rate of return for their excessive risk. In doing so, the external organization must create a series of secondary contracts with both outside investors and their chosen service providers. Due to the fact that the government will not render payment until the conclusion of the contract, the responsibility of funding the project is passed onto the external organization that gains working capital from outside investors. A major concern about the SIB tool is that investors take 100 percent of the risk because the social service may not reach its goals.1 This is why the role of the investor is critical in the performance of the program. By assuming this excessive risk, an outside investor will gain a modest return. Once sources of funding have been realized, the external organization contracts with service providers that will assume the role of conducting a specified protocol for an effective social intervention. The service provider is also employed and managed by the external organization, which provides direct grants as payment for service activities. The role of the service provider is the last in the SIB structure that deals with the beneficiary population or general public by administrating interventions to accomplish the desired result. If the outcome has been achieved, the beneficiary population will become a product of an effective SIB model that will be utilized in future government financial operations. Of course a perfect outcome is ideal, but most social impact bonds have not been as effective as all stakeholders bound within each level of contracts had hoped for. An effective SIB constitutes a fully achieved anticipated outcome without any infringements to the initial contract set forth by the government and external organization. Unfortunately, a break down can occur among any of these different stakeholders. If the outcome was not achieved, the beneficiary population will have been a part of a failed social intervention program and will, hopefully, have not been subjected to any misconduct or other unpleasant experience. A failed SIB would also mean a withdrawal of the government agency’s payment to the external organization, a complete loss of return to outside investors’ provided capital, and termination of activity from the social service providers. The future influence of social impact bonds is reliant on several benefits that are unique among other financial models. One of these benefits includes improved performance and lowered costs.2 With a government agency signing an external organization to manage service operations, many more stakeholders are involved in the success of the program, which influences a more cost-effective intervention. With this being said, by contracting with an external organization, the level of payment or rate of return is set, whereas other preventative or remedial services are given what is known as a legacy funding stream. Services that are a part of the legacy funding stream are provided the financial stability from the government upfront, regardless of effectiveness. The cost-effective benefit of the

1 See Costa, Kristina: “Frequently Asked Questions”. 2 See: Liebman, Jeffrey B.

SIB cuts these legacy funding stream services and reduces the cost by the prescribed payment level as set forth in the government-external organization contract. Likewise, if the SIB service is ineffective, the government doesn’t have any financial obligation. Another benefit embraces the idea that by signing a SIB, the government and other non-profit or for-profit entities will amplify the acceptance of new solutions. Many past financial models have been completely overlooked, while organizations and government bodies continue financing through old techniques. Social impact bonds have the influence to break the archaic mold that has been made, as well as render an era of accepting new programs of systematic thinking. An alternative benefit that branches from the last vindicates the awareness of what is or is not a feasible solution. Again, the old ways of thinking are becoming obsolete in an expedient world such as this, so it is only justifiable for an experimentation to take place to stretch the boundaries of our financial and systemic methods. This application may be a suitable candidate to aid in the efforts to remain at the forefront of national-scale economics, but that is to say we become open to more areas of potential growth such as this. Even if organizational and government entities choose to enact such a financial method as the social impact bond, there are still many challenges and barriers to overcome such as termination risks, executing effective scope, and reaching set timeframes. With respect to termination risks, there is a large issue regarding a necessary amount of net benefits for guaranteeing an investor’s rate of return. This becomes an even bigger problem when external organizations are searching for outside investors because they may not be onboard for reward that is less than the hefty risk that they would be carrying. The issue appears from a divergence of cost setting. Because a contract must be made that sets the price level to a certain degree which must be paid when the service has been rendered and completed in full, the price tag is often times very difficult to formulate. The difficulties that arise when formulating an effective cost payment can be found in an external organization’s scope. The contracting government agency will only sign with an external organization if there is a comprehensive account of their intended intervention procedure. Without a exhibiting a sufficient, measurable outcome, neither the government will approve the contract nor will any outside investors agree to provide funds for the project. Other aspects of an organization’s scope which are frequently overlooked includes defining a treatment population, calculating the impact form the intervention’s absence, and demonstrating humane procedures when dealing with the treatment population.3 Any failure to properly establish any of these components within a social intervention’s scope will deem the contract void and no payment will be tendered. Lastly, a proper mandate from any government agency will incorporate a timeframe within the contract. Due to the unexpected nature of social services, sometimes specifying a set time to achieve a certain goal is one of the most challenging tasks. Complex social implications regularly occur without anticipation because people are multifaceted. Therefore, managing a treatment population is even more complicated when suggesting a specific timeframe to achieve a social service outcome.

3 See: Dermine, Thomas

Social impact bonds touch on areas that include less high-risk services. These services are regarded as remedial because they are unable to be prevented, but rather require more action and involvement.4 With this in mind, SIBs tend to be signed to conduct preventative services because there is less risk and maintenance involved. Currently enacted SIBs impact recidivism, homelessness, and youth violence. Other SIBs have begun surfacing that deal with future interests in preventative healthcare, childhood education, and teenage pregnancy. A Social impact bond is a new financial tool that has been experimented with by a handful of organizations from a few countries, including England and the United States. The first SIB that was tested in an experiment to reduce prisoner recidivism began in Peterborough, England on September 2010. This carefully planned effort, which was signed by the Ministry of Justice, has offered the first real commitment to employing a social impact bond into the world of finance. The main objective found in the contract looks to reduce Peterborough prison’s recidivism rate by at least 7.5 percent. By comparing reoffending rates with other controlled prisons in the area, Peterborough will record the necessary data that will be used to reach their desired outcome. Peterborough prison is an ideal place to experiment with recidivism due to the fact that it is a short term-sentence prison for offenders. With this in mind, Social Finance signed as the external organization with the responsibility to find investors and hire service providers. What they received was 5 million pounds over six years as their funding stream.5 With this money they were able to hire a consultant to draw up an operation plan for hiring service providers. Notable providers, such as St. Giles Trust, Ormiston Trust, and the local YMCA, were issued a secondary contract to begin intervention work with the Peterborough prisoners. The service providers were entrusted with the task of easing the prisoners’ reentry into the community, by means of offering a sense of community in various stages of statutory release. Beginning with a communal center at the gates then aid to prisoner’s families post release, and lastly, the YMCA provided a community base for all prisoners in the area. By easing the prisoners back into the community, the new method proves to be on track to reduce recidivism rates as opposed to the old method of simply releasing offenders back into the community. If the rate continues to drop 7.5 percent from the original 60 percent over an 8-year period, investors will be granted a 13 percent maximum return per year on their investment for 8 years. Through payment by the Ministry of Justice, Social Finance will deal the returns back to each signed investor. Since the signing of the Peterborough SIB, many other organizations in the UK, including Social Finance, have addressed additional social services that are eligible for the new financial method. These services adopt the responsibilities of conducting charitable interventions with homelessness and youth violence.6 Both of these services have been in operation for less than two years, which is relatively too soon to predict the future expectation while both timeframes are set past a period of at least 10 years.7 However, financing from investors has been received and social service partners have been made,

4 "What is a Social Impact Bond?" 5 "Peterborough Social Impact Bond". 6 "Fair Chance Fund." 7 "Investment Example Essex Social Impact Bond."

which proves that social impact bonds are exhibiting a promising future of new, effective financial mechanics. England is not the only country that has began issuing SIB contracts for preventative social services. The United States has taken the initiative to implement the SIB tool among services dealing with recidivism, preventative healthcare, and childhood education. In Riker’s Island New York, New York, MDRC has agreed to contract with the New York City Mayor’s Office and the Department of Correction to create a program, which will combat the issue of disconnected youth. The Adolescent Behavioral Learning Experience or ABLE, is the first social impact bond in the U.S. and aims toward reducing recidivism rates among young adults. Ways of intervention include designing programs focusing around classroom and residential youth services. MDRC is a non-profit, nonpartisan education and social policy research organization that focuses on corrective policies toward social solutions. The structure of the program focuses around MDRC’s operations. Goldman Sachs has provided loans adding to $9.6 million, and $7.2 million of the loan is a grant guarantee on Goldman’s loan by Bloomberg Philanthropies.8 This grant guarantee also compensates MDRC for intermediary costs for the ABLE program. In order for operations to run smoothly and as efficiently as possible in order for reach the objective statistics, MDRC has hired the Osborne Association and Friends of Island Academy to dispense the intervention service among the 16-18 years olds held at Rikers prison. In an effort to reduce recidivism rates up to 10 percent over a four-year period, the Vera Institute of Justice has arranged to conduct an independent evaluation. Again, results pertaining to the reduction of reoffending rates are still unexpected and will most likely surface in an independent cohort study within the next year, however, current inmate violence has dropped by 36 percent within the first year. A number of states within the U.S. have invested in beginning many trials with social impact bonds among of cohort social services. States that have taken a lead by implementing SIBs into the national social service sector include New York, California, South Carolina, Hawaii, and Colorado, and many more. California and South Carolina are both hosting an experimental SIB dealing with preventative healthcare.9 More specifically, Fresno, CA is demonstrating a project to improve children affected by asthma from low-income homes and the reduction of emergency treatment costs. This effort is being managed by Social Finance and Collective Health organizations, which is also the first health-focused Social Impact Bond in the U.S.10 The project is still in its developmental stages, but Social Finance is hoping to finish the groundwork soon. Another social service that has caught the attention of external organizations is childhood education. Particularly within Hawaii and Colorado, childhood education intervention services financed through SIBs are in its most basic stages. Hawaii has produced a bill for an act that requests the legislature of the state of Hawaii to enact said bill. The bill touches on key features that the social impact bond presents, such as private companies serving as a secondary intervention system to reduce the expense on taxpayer responsibilities, while

8 "Social Impact Bond Project at Rikers Island." 9 "Public Health Law and Policy Innovations: Social Impact Bonds" 10 "Grant for Fresno asthma project paves way for Social Impact Bond."

escorting the notion of indistinct returns toward a new alternative.11 Even though ambitions toward implementing a new social service for childhood education is clear, the likelihood of such events occurring is still too soon to for negotiation because education is a high-priority social service. An additional social dilemma that is being addressed through the scope of a social impact bond is teenage pregnancy.12 Washington, D.C.’s mayor, Vincent C. Gray, has taken a bold step in the direction to reduce teenage pregnancy and improve education outcomes within the District of Columbia’s jurisdiction. The mayor assured his constituents in late May of 2014 that SIBs are an “innovative way to ensure better outcomes while reducing risk exposure for the taxpayers”.13 The initiative is still working in steps to gain a Request for Qualification followed by Request for Proposals from well-qualified programs. In conclusion, possible future functions of social impact bonds are just over the horizon, but for now SIBs are still an unproven financial tool. The future adoption of SIBs is apparent as many are waiting to observe the results from the few contracts that are currently enacted. The end result will be another milestone of private corporate intervention within the United States and around the world. Two factors are still pulling on the reigns of the whole operation: the dynamic between preventative v. remedial interventions, and the anticipation that most intervened services will only produce minor reduction costs for government agencies.14

11 "A Bill for an Act: Relating to Social Impact Bonds". 12 "Pay For Success Learning Hub." 1313 "Mayor Pursues Nation’s First Social Impact Bond for Financing Programs to Reduce Teen Pregnancy & Improve Education." 14 See Kahn, Zia

Appendix SIB Structure

Government

Agency

Private Sector Financing

Intermediary Investors

Service Provide

r

Service Provide

r

Service Provide

r

3rd Party Evaluator

Treatment Population

Government agency contract with the PSFI

Agency only pays if outcome is achieved

Agency may hire an additional evaluator during operation

Investors provide funds

PSFI delivers return payment according to level of performance

PSFI signs secondary contracts with service providers

Service provider carries out intervention

Works Cited

1. Costa, Kristina, Sonal Shah, and Sam Ungar. "Frequently Asked Questions: Social Impact Bonds".

Center for American Progress, 5 Dec. 2012. Web. 22 July 2014.

<http://cdn.americanprogress.org/wp-content/uploads/2012/12/FAQSocialImpactBonds -1.pdf>.

2. Liebman, Jeffrey B. "Social Impact Bonds: A promising new financing model to accelerate social

innovation and improve government performance". Center for American Progress, 1 Feb. 2011.

Web. 22 July 2014. <http://cdn.americanprogress.org/wp-

content/uploads/issues/2011/02/pdf/social_impact_bonds.pdf>.

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Web. 22 July 2014.

<http://www.hks.harvard.edu/var/ezp_site/storage/fckeditor/file/dermine_final.pdf>.

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bond>.

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<http://www.socialfinance.org.uk/sites/default/files/SF_Peterborough_SIB.pdf>.

6. "Fair Chance Fund." . Social Finance Limited, n.d. Web. 22 July 2014.

<http://www.socialfinance.org.uk/fair-chance-fund>.

7. "Investment Example Essex Social Impact Bond." Investment Example Essex Social Impact Bond .

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social_impact_bond/>.

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<http://www.mdrc.org//project/social-impact-bond-project-rikers-

island?gclid=CjkKEQjwttWcBRCuhYjhouveusIBEiQAwjy8IK9OwQknPEU65H3Y4lg4C1Gw8u

W1l4I2eBJ3dTBXD6rw_wcB#featured_content>.

9. "Public Health Law and Policy Innovations: Social Impact Bonds". Centers for Disease Control

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10. "Grant for Fresno asthma project paves way for Social Impact Bond." Collective Health.

Collective Health, 25 Mar. 2013. Web. 22 July 2014.

<http://collectivehealth.wordpress.com/2013/03/25/grant-for-fresno-asthma-project-paves-way-

for-social-impact-bond/>.

11. "A Bill for an Act: Relating to Social Impact Bonds". House of Representatives Twenty-Seventh

Legislature, 1 Jan. 2013. Web. 22 July 2014.

<http://www.capitol.hawaii.gov/session2013/bills/HB1402_HD1_.htm>.

12. "Pay For Success Learning Hub." Washington DC Seeks a SIB to Reduce Teen Pregnancy .

Nonprofit Finance Fund, 1 Jan. 2013. Web. 22 July 2014.

<http://payforsuccess.org/resources/washington-dc-seeks-sib-reduce-teen-pregnancy>.

13. "Mayor Pursues Nation’s First Social Impact Bond for Financing Programs to Reduce Teen

Pregnancy & Improve Education". Executive Office of the Mayor, 14 May 2014. Web. 22 July

2014.

<http://payforsuccess.org/sites/default/files/mayor_pursues_nations_first_social_impact_bond_for

_financing_programs_to_reduce_teen_pregnancy__improve_education___mayor.pdf>.

14. "Pay for Success Social Impact Finance." Working Groups: Pay for Success Working Groups.

Council for a Strong America, n.d. Web. 22 July 2014. <http://www.readynation.org/PFS>.

15. Kahn, Zia. "Developing Social Impact Bonds: Where Next?": The Rockefeller Foundation . The

Rockefeller Foundation, 16 July 2013. Web. 22 July 2014.

<http://www.rockefellerfoundation.org/blog/developing-social-impact-bonds-where>.