Social Impact Bonds on homelessness

Diana Parisi

There were 564,708 homeless people in USA in September, 2016. Each homeless person costs the

taxpayers $40,000 per year.

Why so many homeless people are

out there?◦Discharge of tens of thousands of mentally ill individuals

from upstate psychiatric hospitals to New York City communities during the 1970’s

◦ Reduction in the number of single-room housing units◦ Eviction◦Domestic violence◦ Loss of a job◦ Income below the poverty line ($12,082 as of 2015)◦Health issues◦ Criminal history

2016 Presidential budget for the

homelessThe budget intended to help homeless people in 2016 was set to $5.5 billion. These resources are meant to:◦ Educate homeless children and youth ($71 million)◦ Health care ($ 371 million)◦ Assist people in transition from homelessness ($65 million)◦ Treatment systems (treat substance abuse: $41 million)◦ Homelessness prevention ($ 33 million)◦ Runaway youth ($123 million)◦ Creation of new housing units ($ 2.48 billion)◦ Emergency food and shelter ($100 million)◦ Employment assistance ($38 million)◦ Other causes (homeless veterans, police enforcement of crimes

committed by homeless: over $1 billion)

Social Impact Bonds

◦ A SIB is a financial agreement among several parties.◦ The bond targets a certain social issue (in this case,

homelessness).◦ Social bonds carry equity-like risks with bond-like returns◦ It operates over a fixed period of time◦ The bond is profitable only if there is an improvement in the

social cause outcome. It is not tied to government’s savings◦ An independent party will validate the outcomes of a social

project.◦ The bond’s credit rating is the same as the governmental

entity’s credit rating.◦ The first SIB was launched by the UK-based Social Finance Ltd.,

in September 2010. Those social bonds were created to reduce recidivism. The term was set for six years, and the results of the program are promising

How SIBs work

Intermediaries Large investment banks such as:

◦ Goldman Sachs◦ Bank of America Merrill Lynch◦ Others

Not for profit organizations:◦ Social Finance Ltd.◦ Others

Foundations◦ Rockefeller Foundation◦ Others

Duties of the intermediary

◦ Develops Social Impact Bond contract◦ Makes arrangements with the governmental agency◦ Markets the SIB to investors◦ Raises funds from investors◦ Analyses data to understand target population needs and

costs◦ Monitors and manages the actions of the service provider◦ Makes sure the government will not default in case the

project is profitable◦ Receives payments from government (only when project

is successful)

How does the bond issuer ensures the government

will not default

◦ Setting escrow accounts◦ Analyzing the credit score of the governmental entity◦ Introducing flexibility in the outcomes of the cause,

since unplanned obstacles could arise during the project’s implementation

◦ If the governmental entity defaults, it is at risk of lowering its credit score, and jeopardize future multi-year contracts

Investors◦ Issuers (intermediaries) of the bond◦ Philanthropies◦Wholesale investors ( a finance professional with a

minimum yearly income of $250,000 or a net worth of at least $2.5 million)

◦Wealth management funds ◦ Brokerage firms◦ Pension funds (since October 22, 2015, after the U.S.

Department of Labor allowed pension funds to invest in social and environmental causes)

◦ Trust funds◦ Corporation◦ Retail investors need to apply through their financial

advisors. However, not every social bond provides this opportunity

Service providers◦Not for profit organizations◦Well known and reputable in their area of expertise◦ Receive long-term funding from private investors ◦Use the funding to implement the social project◦Might lose tax-exempt status or incur a federal tax

liability (if is demonstrated that they used investors’ money for private purposes)

◦ If successful at the project, will likely be elected for future projects

◦ If project will be unsuccessful, the organization’s reputation will be damaged

◦ Therefore, the organization has 100% interest in the project succeeding

Social Impact Bonds advantages

Social impact bonds are not affected by:◦ Interest rate risk◦ Reinvestment risk◦ Market risk

It is a good portfolio diversification tool, by providing investments that are not correlated with other securities

Creates new temporary jobs If the SIB fails, the investors can write it off as a loss for

tax purposes Taxpayers benefit from SIBs

Social bonds disadvantages Social bonds are vulnerable to:◦Default risk◦ Inflation risk◦ Event risk (a natural disaster occurring which could

delay or stop the project)◦Outcome risk ( will all homeless people remain in

the new permanent housing?)◦ Exit risk (probability of a project’s member quitting

early) Investors could lose the entire investment, in case the

outcome of the social cause did not achieve the targets.

It is difficult to quantify a social issue (you don’t know what you don’t know).

Santa Clara County, California: social bond on

homelessness

◦ Santa Clara had 6,556 homeless people in 2015, 2,800 of them being long-term homeless.

◦ Bond launch date: September 2015◦ Goal: house at least 200 chronically homeless people for a

year or more.◦ Duration: 6 years◦ Capital raised: $6.9 million◦ Maximum outcome payment: $8 million (15.94% ROI or

about 3% annual ROI)◦ Service provider: Adobe Services◦ Intermediary: Third Sector Capital Partners Inc.◦ Major investors: Google, The Health Trust, The Sobrato Family

Foundation, etc.◦ Independent evaluator: University of California, San

Francisco, School of Medicine

PAYMENTS TO BOND

INVESTORS

Payment to Lender per Program Participant Milestone Participant Milestone

$1,242 3 months of continuous tenancy

$1,863 6 months of continuous tenancy

$2,484 9 months of continuous tenancy

$6,831 12 month of continuous tenancy

$1,035 Each month after the first year of continuous tenancy

SOURCE: Third Sector Capital Partners and Santa Clara County

How will the cause be implemented

◦ The service provider will offer mental, behavioral, and health counseling to homeless people

◦Will build 210 housing units◦ The repayment to the investors will start as soon as

homeless people will attain 3 months or more of continuous tenancy

◦ Performance of the bond: data not yet available

Additional information

◦ Adobe Services can discontinue the project in case it is not proven successful after first several years

◦ If the project is successful, the county will save $3.1 billion in six years, or $30,000 per homeless per year

◦Many homeless people do not remain in permanent housing mainly due to mental illnesses ( fear of other people living near by, fear of the unknown, fear of small spaces etc.)

Denver, Colorado: social bond on homelessness

◦Denver has 6,200 homeless people and spends $7 million per year for homeless people’s needs

◦Bond launch date: February 2016◦Goal: counsel and house at least 250 highly vulnerable

homeless people for a year or more◦Duration: 5 years◦Capital raised: $8.7 million ◦Maximum outcome payment: $11.4 million (6%

annual ROI on average)◦Service provider: Colorado Coalition for the Homeless◦ Intermediary: Social Impact Solutions◦Major investors: Walton Family Foundation, The

Northern Trust Company, The Piton Foundation, etc.◦ Evaluator: Urban Institute

Payments to bond investors:

◦ Investors will receive $15.12 per each person for every day that a homeless individual spent in a housing unit minus number of days spent in jail.

◦ For example: if 50 homeless people spent 10 days in housing, the investors will receive $7,560.

◦ The payments will begin from day 1 of a homeless person spending in the housing

◦ Performance of the bond: data not yet available

How will the cause be implemented

Efforts to:• Manage mental illnesses• Reduce interaction of homeless men and women

with the criminal justice system Crisis intervention Substance use counseling Peer support Skills building Etc.

Massachusetts: social bond on homelessness

◦Massachusetts had 21,135 homeless people in 2015◦Bond launch date: December 2014◦Goal: house at least 800 chronically homeless people for a

year or more.◦Duration: 6 years◦Capital raised: $3.5 million◦Maximum outcome payment: $6 million (5.3 %

maximum possible ROI) ◦Service provider: MHSA (Massachusetts Housing and

Shelter Alliance)◦ Intermediary: MASH (Massachusetts Alliance for

Supportive Housing)◦Major investors: Santander Bank N.A., Merrimack Valley,

etc.

Payments to investors

◦ The homeless person must spend at least 1 year in the housing, or the returns to investors are $0.

◦ Investors will get paid every quarter after the first year that the program is successful

◦ Investors will receive $8.22 per day per housed homeless

◦ Time a person spends in housing is cumulative ◦ For example, a homeless person spends 200 days in

the housing in year 2015, and 165 days in year 2016. That will count as one full year.

How will the cause be implemented

◦ The project will provide 500 units of housing over the 6 year period

◦ The targeted population will be individuals who are homeless a minimum of 5 years

◦ Provision of medical and mental health services , substance abuse treatment

Massachusetts social bond results◦ Since the year 2014, the cause successfully has placed

over 250 homeless people in permanent supportive housing.

◦ The outcome attained significant cost savings in emergency room visits and detox clinics used by homeless.

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