Peter Greene educated himself about “social impact bonds” and has graciously taken on the task of explaining what they are and how they work.
He writes:
Here’s the basic structure of a Social Impact Bond. Note: I am not an economist, banker, or investment counselor, nor do I play one on TV, so I may cut a few corners here.
My house is drafty. My windows leak and my heating bill is $10,000 a year.
My landlord goes to the bank. She says, “Banker, I would like a bond of $4,000 for new storm windows. I think they would reduce my annual heating bill by $3,000.”
And the investor issues a bond for the program costs, in return for which he gets a healthy cut of the $3K saved by installing the new windows. My landlord’s savings from the successful Stop Freezing My Butt Off Social Program become the bond holder’s profit– but only if our goals are met.
Typically a third party will come in to judge the result, making sure that I didn’t just turn the thermostat down or it wasn’t just a warm winter or my landlord didn’t actually save $6K and hide it from the bondholder. Also, it’s worth noting that bonds generally come with negotiated maturity dates, at which point the original loan amount is to be paid back. And remember kids– bond holders are different from investors. An investor owns part of the company, but a bondholder is just a fancy debtor, and as such has legal priority for being paid back.
In this example, the government is, more or less, my landlord. For a more thorough explanation, we can look here. Here’s the shortened version of their explanation:
In the classic… social impact bond, a government agency sets a specific, measurable social outcome they want to see achieved within a well-defined population over a period of time. …The government then contracts with an external organization—sometimes called an intermediary—that is in charge of achieving that outcome. … The intermediary hires and manages service providers who perform the interventions intended to achieve the desired outcome. Because the government does not pay until and unless the outcome is achieved, the intermediary raises money from outside investors. These investors will be repaid and receive a return on their investment for taking on the performance risk of the interventions if and only if the outcome is achieved.
Okay, Watch Carefully Now
From New York Times coverage of a SIB program that failed. “Social Impact Bonds offer a strikingly different way to pay for social programs. Governments, rather than tapping taxpayers, can turn to outside investors and philanthropists for funds, and reward them only for programs that work.” If the program fails, the taxpayers are off the hook. If it succeeds, the bond holders are paid off with what would have been taxpayer savings of taxpayer dollars.
But the finances get muddier because in the couple of years we’ve been trying this, we’ve learned a useful insight:
“The tool of ‘pay for success’ is much better suited to expanding an existing program,” Andrea Phillips, vice president of Goldman’s urban investment group, said in an interview on Wednesday. “That is something we’ve already learned through this.”
But issuing bonds for existing programs means we’ll have public and private money swimming in the same pool.
For the rest, and the links, open the article.
http://www.governing.com/government-quotes/gov-angus-king.html see Angus King quote in congressional testimony about social impact bonds….
“this is an admission that government isn’t doing what it is supposed to be doing…..” it’s a neat summary on one page in Governing magazine (there is still a social impact bond project in MA on juvenile justice; beware they are going to be pushing these in all the special education programs in your schools)….
watch/beware in your special education programs. Melody Musgrove (special Ed/USDept of Ed) says we must move away from “compliance” (meeting the requirements in the IEP) and then the orwellian definition of accountability is tossed in here in her speeches. The policy decision is “cut and safe money” in special ed and bilingual so invent these hedgy/risky/frisky social impact bonds to create school programs. There were 4 (mostly in juvenile justice; there is still one in MA ). These programs are ripe for psychometric fudge (lying with the data for profit$$$) ; yesterday, I heard the Mayor of Boston’s data guru questioned on “juking the data” when it comes to evaluating his impact on the city… I don’t use that expression but data rigging is a big opportunity here. Mayor Walsh thinks he has become the leading data informed “guru” among mayors.
at any rate .. Melody Musgrove is pursuing this in special ed and she wants to “disrupt” (her word) IEP teams in the local schools. Evidently, the people who work with the children and families don’t know anything about teaching/learning so we need to bring in the privatizers.
Click to access special-edition-1.1.pdf
this is only one of her speeches ; she went around to a lot of conferences and different states; she also signs the “Dear Colleague” letters when a state is sent to the “woodshed” for some reg. or waiver in special ed that she doesn’t want to approve. A lot of power in that office (despite what Obama said a week ago).
The truth is, it’s nearly impossible for a teacher to get fired because of poor test scores. – Kevin Huffman (Michelle’s ex)
https://www.washingtonpost.com/opinions/we-dont-test-students-as-much-as-people-think-we-do-and-the-stakes-arent-really-that-high/2015/10/30/3d66de1c-7e79-11e5-beba-927fd8634498_story.html
“The initiative will allow Roca to provide its high-impact intervention to 929 at-risk young men aged 17 to 23 who are exiting the juvenile justice system. Roca’s programming aims to reduce recidivism and increase employment through intensive street outreach and targeted life skills, education and employment programming. The Roca intervention is delivered over an intensive two-year period followed by two years of follow-up engagement.
Massachusetts will make up to $27 million in success payments for this seven-year project, which is the largest investment in a PFS initiative in the U.S. to date.”
thirdsectorcap.org has this description
payments: “The Commonwealth makes payments for success if the independent third-party evaluator and validator determine that Roca’s program has reduced the number of days that participating young men spend in prison, has improved their job readiness, and has increased their employment. At higher levels of success the funders can receive a small percentage return on their funding in return for assuming the up front financial risk.”
as we have seen in Lawrence Public Schools Pearson writes evaluative reports on how much the data (test scores) improve but it is the same thing that is happening with New Orleans etc. There are so many ways to “rig” this kind of study.
MathBabe explains social impact bonds:
social impact bond “Thirdsectorcap.org” http://www.thirdsectorcap.org/portfolio/massachusetts-juvenile-justice-pfs-initiative/
Nonprofitquarterly.org has a good summary of states responses….. and they list the “players” (Kennedy, Franken, Patty Murray etc)…
quote: “The problem, as the Minnesota Council of Nonprofits’ Jon Pratt told Nicole Wallace of the Chronicle of Philanthropy, is that SIBs have “been overpromoted and oversold…We have yet to have a single transaction completed, and yet multiple states and multiple agencies are jumping ahead.”
“How do you make money on an investment in something that creates no profit?”
And that my friends succinctly sums up the dilemma.
The purpose of being for each sector is completely different; for-profit business (of which, in it’s rightful place,I am not arguing against) or a no-profit organization, public schools and therefore have differing priorities, methods, evaluation parameters, etc. . . . Yes, one can mix oil and water, but the two will eventually separate out as they are incompatible in basic makeup. So it is with for-profit and no-profit sectors.
Obama gave $200 million to help jump-start SIBs (for “Social Impact Bonds”) also called Pay-for-Success contracts. Harvard has a SIB lab to help propagate these financial products for social services, a form of outsourcing these to private investors but with some noteworthy differences from more conventional bonds.
Language is important. These are financial products marketed to investors as “social impact bonds” because there an aura of altruism attached to the investment that also comes with low risk- The potetial profit offered investors is making 5% and upward as a return on investment. However, the more accurate term for this financial product is a “pay-for success-contract.” Taxpayers in the State of Utah will be paying investors for letting “intermediaries” manage a process of scaling up and contracting out pre-school services that have been successful at their present scale. Investors go after low risk opportunities with a decent payoff. The marketers have every incentive to rig the contract for payouts, even though there is supposed to be an independent evaluator of the outcomes from scaling up the program.
The Utah program is not just about preschool, because successive cohorts of children will be monitored as they enter and progress through the grades, with results from periodic tests fed to the independent evaluator, thence to the “intermediaries,” who calculate the payouts for investors for each cohort.
Moreover, there is a control group for each cohort of potential “payout children.” The control groups are children excluded from the program, the “counterfactuals.” They are tracked in order to show that the preschool intervention made a difference.
So we have, thanks to the ever-expanding monetizing of our children and making kids into guinea pigs for investors, two new ways to describe our children, our students.
Either they are potential “payout children” or they are “counterfactuals.”
Chicago has a similar program for pre-school. That program is making use of research on the monetary value of preschool formulated by Nobel economist James Heckman. I understand that scores on the Peabody Picture Test play a big role in placing children into these programs.
You can see how the monetary values are assigned to a high quality preschool program in NYC at Robinhood.org metrics. They take pride in their “Relentless Monetization“ of the “value-added to lives” by the programs they sponsor. The last time I looked at Robinhood’s formulas, the value of high quality preschool was $53,000 per year for child per year, extended through high school graduation into college completion and/or workforce participation.
The nation’s first Social Impact Bond experiment organized as a financial product by Goldman Sachs was intended to reduce the rate at which juvenile offenders returned to Rikers Island. The program didn’t work but gee… the private investors have the data and their investments were backed by philanthropic largess—Bloomberg in that case.