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Center for Advanced Studies in Child Welfare

Center for Advanced Studies in Child Welfare

Social impact bonds, impact investing, pay-for-success contracts...

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In today's United States, where nobody asks how much we should add to the social services budget, where the word "tax" causes serious arguments, and where children only receive a minute portion of the overall federal budget, the possibility of alternative ways of financing the child welfare system is quite intriguing.

In the last few months, a few phrases that have virtually the same meaning have been catching my eye: "social benefit (or impact) bonds," "impact investments," and "pay-for-success contracts." (Throughout this post I will use the phrase "social impact bonds.")

Social_Impact_Bond_diagram.JPGSocial impact bonds originated in the UK; in the U.S., Massachusetts and the city of New York are currently experimenting with them. A nonprofit in Oregon made Huffington Post headlines through their work using social impact bonds to assist individuals dealing with poverty, homelessness, and substance abuse.

Great, what are they?

Basically, private investors provide financing up front to government agencies (such as human services), who then work to meet certain agreed-upon outcomes. If the outcomes are met, the government actually ends up saving money, there is a return on investment, and the investors are repaid with interest. If outcomes are not met, the investors will not be repaid, but taxpayers are also not responsible for footing the bill either.

One example of how these bonds can be utilized is through prevention work: If the bonds are used to invest in child abuse prevention programs, states will save later on as children's risks of foster care and juvenile justice involvement as well as mental and physical health problems are decreased.

Rather than measuring outputs (as in, the number of children involved in early childhood programming), social impact bonds measure outcomes (as in, less involvement in juvenile justice). The problem is that measuring outcomes takes much longer and is harder than measuring outputs: It's easy and faster to count the number of children, but to measure the rate of juvenile justice involvement will take years and would require control groups or at least a comparison of past rates of involvement.

Sooo, what's next?

Last year, the Obama administration attempted to include pay-for-success programming in their budget, but it was voted down by Congress. This year, the administration is piloting programs in the Departments of Labor and Justice using this type of programming, through the Workforce Innovation Fund and Second Chance Act grants. In addition to Massachusetts, New York City, and Oregon, other states and organizations have also begun looking into the idea.

What do you think of social impact bonds? Do you have any firsthand knowledge or experience with them?

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