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Pay-for-success projects, which rely on outside investors—rather than taxpayers—to provide working capital to nonprofit service providers, are trying to tackle thorny social problems.
This article by Teresa Wiltz was originally published by Stateline, an initiative of The Pew Charitable Trusts.
For more than 30 years, Alan has lived on the streets of San Jose, California, battling drugs and booze, bipolar disorder and a slew of other psychiatric ailments. From the start, he said, “I never had a chance.”
But now, Alan, 57, is being offered a chance, and he’s grabbing it: This week, he moves into his own place, thanks to an innovative financing program to address homelessness, the first of its kind in California — and one of a very few in the country. As part of the pilot program, he will receive intensive support from a battery of caseworkers, housing specialists and psychiatrists.
It’s what’s known as a pay-for-success project, which relies on outside investors — rather than taxpayers — to provide working capital to nonprofit service providers trying to tackle thorny social problems like homelessness, juvenile delinquency and mental illness.
The idea is to invest money and energy in programs that work — and to hold service providers accountable for meeting specific, measurable goals. In Santa Clara County, for example, where Alan lives, a group of investors including Google and the Sobrato Family Foundation put up $6.9 million to fund the 6-year project. To see a return on their investment, more than 80 percent of the formerly homeless have to maintain stable housing for at least a year. As goals are met, the county will make payments to investors, up to $8 million.
Such deals are complicated. And their approach is so new that only a handful of state and local governments have begun experimenting with them. But their numbers are increasing.
Last week, Connecticut Gov. Dannel Malloy, a Democrat, announced a four-year, $12 million initiative to keep the children of 500 families out of foster care. The same day, South Carolina Gov. Nikki Haley, a Republican, announced a $30 million, four-year plan to pair registered nurses with low-income pregnant women to usher them through their child’s second birthday.
The Obama administration also likes the approach. Last year, the U.S. Department of Justice and Department of Housing and Urban Development earmarked $8.7 millionfor pay-for-success projects addressing chronic homelessness.
In 2014, Massachusetts launched a $3.5 million pay-for-success initiative to address chronic homelessness in the state. Last year in Ohio, Cuyahoga County officials launched a $4 million plan financed by outside investors that places homeless families in permanent homes. The goal is to cut the amount of time homeless children spend in foster care by a quarter.
In Denver, eight investors have injected $8.7 million into a program to serve 250 chronically homeless people. Mayor Michael Hancock announced last week the city was starting phase one: moving 25 homeless people into a new long-term housing facility. (Los Angeles County, California, and Salt Lake County, Utah, are also exploring using the model for a variety of projects.)
Denver officials hope the project will inspire greater investment in housing, boost mental health services for the chronically homeless and keep people out of the criminal justice system.
“We’re going to get 250 homeless people off the streets, which will be an incredible feat,” said former Denver Deputy Mayor Cary Kennedy, who stepped down this month from her position. “And if we can use that to change public policy, we can have an even bigger impact.”
The financing plans are also called social impact bonds. They got their start in 2010 in Peterborough, England, as a way for the British government to work with nonprofits to reduce recidivism rates among ex-offenders. Since then, local governments in the U.S., Australia and Canada have started using them as a way to expand social services.
The name is a misnomer. Social impact bonds actually function like loans: Private investors provide capital to nonprofit service providers, who collaborate with local government agencies to hash out specifics. At the end of the contract, an independent research team analyzes the results. If the goals are met, the government repays the funders, usually paying interest. If the project doesn’t meet its goals, investors lose money.
The bonds are meant to foster creative solutions to entrenched social problems, with an emphasis on tracking results along the way. As such, they are a good fit for projects that address homelessness, said Caroline Whistler, who co-founded Third Sector Capital Partners, a financing group that has worked on pay-for-success projects in California, Massachusetts and Ohio — among others. Because chronically homeless people frequently cycle through jails, hospitals and mental health facilities, they are a population whose progress is relatively easy to track, Whistler said.
Normally, service providers carve a budget out of whatever grants they can get. Instead, with pay-for-success programs, investors and government officials ask what it would take to be successful. “I’ve never had anyone ask me that,” said Louis Chicoine, executive director of Abode Services in Fremont, which manages the Santa Clara project.
Santa Clara County Supervisor Dave Cortese said social impact bonds can be more effective because municipalities create a pot of money and dole it out like a construction loan, paying along the way as results are documented. “It sounds like a no-brainer,” Cortese said. “But local governments never operated that way.”
But critics argue that social impact bonds are too complicated; aren’t likely to inspire innovation because of the pressure to produce; and aren’t likely to save taxpayer money in the long run.
Introducing third parties — investors and evaluators — into the mix creates extra expenses and opens up “a whole host of problems,” said David Juppe, a top official in the Maryland Department of Legislative Services, which studied the viability of social impact bonds in 2013.
Deals are negotiated between funders and governments with no regulations on the amount of interest funders can charge, Juppe said. “It’s government by loan shark,” he said. And pressured to produce, service providers might be tempted to play it too safe, rather than come up with creative solutions, he said.
It’s too soon to know if these programs will work over the long run. The original program in Peterborough was phased out last year after it failed to meet its targets.
And Goldman Sachs lost $1.2 million on a program aimed at reducing recidivism at Rikers Island, one of the country’s largest jails. Because of a grant from Bloomberg Philanthropies, Goldman recouped the bulk of its $7.2 million investment.
“They’re not proven yet. That’s the caveat,” said Roseanne Haggerty, president and CEO of Community Solutions, a New York-based nonprofit that works with communities to find solutions to homelessness, but has not worked with the new financing tool.
Still, Haggerty said, “It’s exciting. It’s an opportunity to dispel the problem and spend money more prudently. And also educate us all on how to do it.”
Saving Lives — and Money
Five years ago, Denver officials discovered they were spending $7 million a year on just 250 people from the city’s more than 6,000 homeless men, women and children, Kennedy, the former deputy mayor, said.
These chronically homeless people are the most frequent residents in the city’s jails, courts and emergency rooms, she said. Most have been living on the streets for at least a decade, struggling with severe mental illness and addiction. Each year, they account for 14,000 days in jail; 2,200 visits to detox facilities; 1,500 arrests; and 500 emergency room visits.
So the city decided to get those 250 people into permanent housing with as few strings as possible, while surrounding them with a support network, she said. A group of eight funders — including the Nonprofit Finance Fund, a community development group funded by banks, corporations, foundations and others, and the Northern Trust Company — will invest $8.7 million. The program, which uses a mix of new and existing housing, will also rely on $15 million in federal funds to build new units.
Denver will start repaying investors if participants stay in supportive, permanent housing for at least one year and if the amount of time they spend in jail is reduced by at least 20 percent, said Tyler Jaeckel, a government innovation fellow with the city.
Ultimately, the city could save as much as $18 million, Kennedy said, because of the reduced time spent in the criminal justice system and detox facilities, and fewer emergency room visits. Some of those savings could then be used for housing programs. The city will repay its investors as much as $11.4 million.
“There’s so much focus on the financing mechanism. That’s the shiny new ball everyone sees,” Kennedy said. “But the most important thing is the system gets reformed.”
In Cleveland, homeless children often spend long stretches in foster care, and it can be difficult for families to navigate the city’s many service agencies, from resolving child safety issues to finding permanent housing.
A group of five investors, including the Sisters of Charity Foundation of Cleveland, put up $4 million for a program that seeks to reduce the number of days homeless children spend in foster care by a quarter over five years.
Caroline Wagner, of Enterprise Community Partners, a partner in Cuyahoga County’s pay-for-success project in Cleveland, said that under the terms of the deal, different agencies are now required to work together to help meet families’ needs and track their progress.
In Santa Clara County, home to high-tech billionaires and millionaires, roughly 6,500 people are homeless. Of that number, more than 2,200 are chronically homeless.
Each year, the county spends $520 million caring for its homeless, Cortese said, but it hasn’t been effective. Supportive, permanent housing through the pay-for-success model is the way to go because it requires accountability along the way and makes it easier to keep track of those who need help the most, he said, and he’s considering using the model to attack other social issues.
Since the program’s start last August, the county has found homes for 45 people, and it expects to house 125 by the end of this summer, according to Chicoine.
Joining them this week is Alan, who has been staying in a sober living shelter since he decided to come off the streets in January. Already, he said, “My life has been on the upspiral.” Yes, he’s terrified at the prospect of living alone in his own place.
“But I’m excited, too,” he said. “I believe I’ve been given another chance.”
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