California Seeking to Partner With Private Sector in “Pay-for-Success” Program


California Seeking to Partner With Private Sector in “Pay-for-Success” Program

Sacramento considering social impact investment

“Pay-for-success” isn’t exactly what comes to mind when thinking of how California government spends tax dollars, so we take special notice when legislators in Sacramento pass bills based on the concept.

Earlier this year the Senate passed – and the Assembly is now considering – Senate Bill 593, which would create a new “pay-for-success” pilot program for social impact partnerships. The idea is for the government to tap private sector dollars and expertise to advance new, evidence-based approaches to better address issues like child abuse and neglect, education, homelessness and recidivism.

California would determine the results it is seeking to achieve in those ares – a specific reduction in the recidivism rate, for example. Private investors and philanthropic groups would then finance the work of nonprofits to deliver new, evidence-based social service programs on behalf of the state under a performance-based contract model.

If the privately funded programs achieve the state’s goals, improve outcomes and save public funds by seeing fewer released offenders returning to prison, for example, then the investors will later receive success payments from the state.

But if the programs don’t deliver results, taxpayers don’t pay, and it is the private investors who may lose their money. This risk keeps the focus squarely on delivering bottom-line results.

California is following in the footsteps of New York, Massachusetts and Illinois, which all launched pay-for-success programs in the past six months. New York Gov. Andrew Cuomo launched a social impact partnership to reduce recidivism among 2,000 recently released prisoners through intensive employment training and job placement services delivered by an established nonprofit. Bank of America Merrill Lynch raised the bulk of the investment capital in this $13.5 million program.

New York aims to reduce recidivism by at least 8 percent or increase employment of ex-prisoners by at least 5 percentage points. If the state’s partners reach or exceed these targets, New York expects to realize $7.8 million in savings for taxpayers, and investors would stand to earn a positive return on their investment. If the outcome targets are not met, the state won’t pay.

Massachusetts, Illinois and New York City have launched similar pay-for-success programs aimed at reducing recidivism among youth offenders. South Carolina, Ohio, Michigan and Colorado won a competition last year held by the Rockefeller Foundation and Harvard University’s Kennedy School of Government, and those states will receive technical assistance to advance pay-for-success projects.

While the concept of blending private financing and public social interventions is promising, social impact partnerships are complex deals with many moving pieces. If SB593 is enacted, any resulting partnerships will require the state to carefully identify performance expectations, write strong contracts that minimize taxpayer risk and rigorously monitor outcomes to ensure that its private partners deliver on their promises.

But, if designed and implemented well, the payoff could be huge, especially in areas like recidivism, where California has seen poor results for years. Over the last decade, more than half of adult felons released from California prisons have returned to the correctional system within two years, a vicious cycle that is costly to both society and taxpayers.

The status quo isn’t working. That’s why it’s so encouraging that California policymakers are willing to partner with the private sector to drive better performance in government. If the private sector wants to pay for the state to experiment with programs that improve social outcomes and reduce costs, it could be a major win for both the programs’ recipients and taxpayers.

Leonard Gilroy is director of government reform at Reason Foundation. This article originally appeared in the Orange County Register.