On April 11, Illinois unveiled a social impact bonds initiative that aims to boost social programs at no additional cost to taxpayers. Illinois joins the United Kingdom, Massachusetts, New York City, powerful philanthropic organizations, and financial firms such as Goldman Sachs in exploring the promise of social impact bonds (SIBs).
Why are government agencies so interested in this new form of finance? With SIBs, a government program is financed by a third-party (for example, a nonprofit or company) that is paid when the outcome is deemed successful using predetermined, concrete metrics of evaluation. SIBs (also referred to as Pay for Success) allow governments to control project metrics and evaluate outcome without requiring additional money or cuts to other parts of their budget.
In Forbes, Jessica Joseph, Associate Director of Innovation at the Rockefeller Foundation, spoke of the appeal of this ingenious new form of funding. “[A]s is often the case, difficult times often breed the most significant innovations – as philanthropists, governments, investors, and non-profits are forced to think beyond the usual solutions and seek out new and different ways to address our greatest challenges.”
Financial firms are backing SIBs, too. In the case of a SIB between the New York City Department of Corrections and Goldman Sachs, the firm could make $2.4 million, while the city hopes to reduce teen recidivism by 10%, which could save the city and taxpayers millions.
As Alicia Glen, director of the Goldman Sachs Urban Investment Group, explained on NPR, “Essentially what it is, is saying we can use private capital to finance a government-sponsored program… So you have the private sector paying for the service, and then the government saying if the service works, we will pay you X dollars based on the level of impact that’s achieved.”
SIBs are ideal for programs that maximize social impact, such as reducing hospital readmissions or increasing youth outreach and rates of high-school graduation.
Illinois has yet to determine which programs are right for this opportunity, and they will explore the options with assistance from the Harvard Kennedy School’s Social Impact Bond Technical Assistance Lab, the Rockefeller Foundation, and $275,000 from the Aurora, Illinois-based Dunham Fund. The use of SIBs was proposed by the Governor’s Task Force on Social Innovation, Entrepreneurship and Enterprise.
Judith Rodin, President of The Rockefeller Foundation, praised Illinois’ forward-thinking move: “By bringing in financing from private and philanthropic sources for demonstrated social interventions, social impact bonds offer a win-win-win proposition for governments that can provide well-proven interventions without using tax dollars, for local organizations that can take their programs to scale, and for investors that can get both a social and financial return.”
- News update: Social Finance’s Sarah Henderson describes how Pay for Success is being incorporated into US and Australian budgets.
- Watch PBS’ report on Rikers Island’s efforts to reduce recidivism using SIBs
- Check out a social impact bonds fact sheet from the Center for American Progress