Tuesday, June 28, 2011

Pay for Success Bonds: An Innovative Way to Do More with Less

Debates and discussions about the future of federal spending seem to dominate the headlines today, and the general consensus is that cuts to discretionary programs – such as those that promote affordable housing – are inevitable. In the midst of these conversations, one line-item in the President’s Fiscal Year 2012 Budget has gotten less attention than it perhaps deserves: $100 million to pilot a Pay for Success bond program.
Called “social impact bonds” in the United Kingdom, Pay for Success bonds would allow the federal government to pay only for programs that meet predetermined outcomes. The concept is fairly straightforward: Private investors and philanthropies, the federal government, and service providers would agree to support an innovative program that is intended to achieve certain societal outcomes in a cost-effective manner. The partners agree to a set of targets that demonstrate whether the program is successful. The investors and philanthropies provide the initial capital, and if the targets are achieved, the federal government repays their costs and, if very successful, a healthy return on their investment. If the targets are not achieved, the investors do not recoup their contributions.
For the federal government, this is a winning proposition because it only foots the bill for programs that work. Socially-motivated investors that back successful programs can support strategies they believe in and use their recycled funds for other projects. And programs with potential have the opportunity to prove themselves.
Unfortunately, housing programs do not appear to be eligible for Pay for Success bonds in the President’s budget. Only a few program areas are identified as eligible, and they are focused on “prevention strategies” that lower future government costs. Examples of eligible programs on the White House fact sheet include efforts to reduce recidivism or increase early childhood interventions, thereby reducing future criminal justice and education costs, respectively.
If successful, however, there is no reason that Pay for Success bonds shouldn’t be available to fund innovative housing programs in subsequent years.  Emergency assistance programs that keep renters in their homes can lower homeless shelter costs. Help with mortgage payments during periods of unemployment can keep otherwise stable homeowners from facing foreclosure – a process that can be very costly for municipalities.  Affordable housing has also been shown to positively impact both health and educational outcomes, and any number of pilot housing programs might demonstrate savings in these sectors.
Despite a number of challenges and limitations, Pay for Success bonds appear to represent a silver lining in an otherwise cloudy budgetary picture. The concept is an innovative way to do more with less, and its implications for creative affordable housing programs should be explored.

1 comment:

Frank Woodruff (NACEDA) said...

I am glad to see this post by NHC. A debate about Social Impact Bonds in the housing sector is healthy and will be necessary if the concept is to move toward any kind of implementation stage.

NACEDA Member and Massachusetts Association of CDC's Executive Director Joe Kriesberg wrote an extensive blog on the SIBs about 6 weeks ago.

Below we are cross-posting a link to his thoughts.