Federal Support for Pay-For-Success

By: Jennifer A. Chu

Previously in Part I, I examined the history and critique of social impact bonds (SIBs). In Part II, I will discuss PFS initiatives in federal policy.  

Author’s note: the terminology “Pay For Success” is often used interchangeably with SIBs.

The rise of the Pay for Success (PFS) movement in federal policy can be traced to the Obama administration. PFS [was] the centerpiece of the administration’s social agenda because of PFS ability to overcome barriers and enable innovation. In 2009, the Obama administration established Social Innovation Fund (SIF), which supported both private-sector partnerships and evidence-based grant making. SIF would identify and support solutions with an impact in “economic opportunity,” “healthy futures,” and “youth development.SIF, housed in the Corporation for National Community Service (CNCS), “SIF Classic,” awarded grants of 1M – 5M annually for up to five years to intermediaries who would match federal funds “dollar-for-dollar” and then “identify the most promising nonprofit organizations working in low-income communities that have evidence of compelling results.” Selected non-profits also received technical assistance for implementation in addition to funding.

The Pay for Success movement evolved to create social impact bonds (SIBs). SIBs tie private investor returns to the success of measurable outcomes of service providers. After the “success” of the first-ever social impact bond in the UK in 2010, local and state governments in the US took notice and began to implement to create their own SIBs with investors, focusing on a variety of issues from reducing recidivism rates, housing the homelessaiding single mothers, to varying degrees of success based on the SIBs own evaluative measures.

In 2014, in response to the growing number of domestic SIBs, CNCS provided an additional $30-plus million to develop Pay For Success projects, creating SIF PFS. SIF launched its SIF PFS arm awarding, in March 2016, $18.1 million to eight private sector funders and in September of the same year, another $4.05 million to three applicants to help deliver technical assistance and data access support for PFS projects as part of its “Administrative Data Pilot.” Compared to SIBs, SIF PFS tended to have a longer evaluation period (three years) compared to SIBs (two years). In addition, the SIF PFS released public RFPs and had standardized guidelines for selection, unlike SIBs, which did not require public disclosure nor evaluation uniformity. By the end of SIF, there were over $341 million in federal grants and more than $672 million in non-federal match commitments.

In addition to SIF PFS, in 2014, the Obama administration also created the Workforce Innovation and Opportunity Act (WIOA), which governed workforce development governance. WIOA gave state governments greater flexibility in allocating their funds and created a permanent PFS authority within funding streams.

As more SIBs and other PFS initiatives came to their conclusion, policy makers fiercely debated the role of SIBs and their effectiveness in the May 2014 Budget Hearing. SIBs received support from Senators such as Senator Sheldon Whitehouse (D-RI), who noted the opportunity to save money, and Senator Mark Warner (D-VA), who identified the federal government’s inability to identify effective strategies. On the other hand, Mark Fisher from Maryland’s House of Delegates had criticized SIBs.  Earlier that year, Maryland had conducted its own state analysis of potential SIBs, focusing on reentry programs. The study determined that pilot programs “cannot create a large enough reduction in demand to close a facility” and that “given the difficulty of linking the evaluation of a social program to a highly complex contract centered on an outcome payment, the government may actually increase the operational risks in undertaking a SIB.” Mark Fisher concluded that “SIBs are well intended, but they unnecessarily blow bureaucracies. Moreover, they have the potential of leading to crony capitalism. And as the Maryland Department of Services concluded, they do not save money.”

Despite these misgivings, funding for PFS initiatives have continued. Encouraged by the results from a UtahSIB which increased access to preschools, Senator Orrin Hatch (R-UT) included Pay For Success into Every Student Succeeds Act (ESSA) in 2017. This allowed for federal dollars to fund Pay for Success projects in state and school districts.

Even though SIF was cut in the most recent budget deal, the principles of PFS remain very much alive in Social Impact Partnerships to Pay for Results Act (SIPPRA). SIPPRA, supported by both parties,  passed on February 9, 2018 as part of the Bipartisan Budget Agreement. SIPPRA is the first attempt at implementing PFS at a federal level. SIPPRA will fund up to $100 million to support state and local government PFS initiatives for the next ten years. Housed in the Department of Treasury, SIPPRA will begin releasing its RFPS in early February 2019 and focus most of its efforts on children — at least 50% of all federal payments under such agreement must be used for initiatives that directly benefit children. SIPPRA formalizes and embeds PFS into federal policy with strict application and evaluation requirements. Unlike SIBs and SIF PFS, SIPPRA requires and conditions applicants to have a long-term plan and also provides for a GAO evaluation 5 years after the enactment.

Even outside of SIPPRA, PFS principles still find support in the Trump Administration and within local governments. The Trump Administration has created the White House Office of American Innovation, which focused on “scaling proven private-sector models to spur job creation and innovation” and also address the opioid crisis. The office, led by former SIB investors, has led observers to suggest that the White House Office of American Innovation could potentially serve as an alternative source to SIPPRA for PFS funding.

SIPPRA, despite its use of evaluations and feasibility studies, is likely not immune from the same policy risks as SIBs. SIPPRA became public law as part of the Bipartisan Budget Act of 2018 and larger public policy overhaul. Since SIPPRA’s passage, the first set of IRS guidance on Opportunity Zones was released in October. The guidance provides a very generous climate for opportunity investors, but the impact on communities will not be determined until next year.  As many social impact bonds attempt to redress complex social ills, academics, like Professor Williamspoint out that it is difficult to attribute a SIB’s success solely to that the program. It is possible that the introduction of opportunity zone investment and other policies would complicate the evaluation process for SIBS.