By Daniel Clothier
States must surmount various challenges when seeking to remedy a social issue. The state takes upon itself a significant degree of financial risks whenever engaging in new social/welfare programs. Therefore, financial and political constraints tend to guide policymaker’s actions and control the scope of these programs.
The Pay for Success (PFS) financial model introduces an alternative method for financing social programs. In this model, private investors provide funding to a nonprofit organization charged with tackling a public issue. The private investor is paid back, potentially at a profit, by the government if the project achieves the agreed upon results. The model is promising due to its ability to divert financial risk from taxpayers to private investors, should a project not achieve it’s intended outcome. Ideally, the PFS model can remove many of the constraints limiting the scope of innovative social programs.
Pay for Success is unique in its aim to capture return-seeking capital. By creating a profit incentive, the PFS model strives to use investment dollars to solve public issues. In theory, this will significantly increase the funds available for such projects. However, a report in the Stanford Social Innovation Review is skeptical that the PFS model is actually attracting return-seeking capital but instead is relying on impact-seeking capital. Philanthropy’s prominent role in recent PFS deals suggests this may be true. Furthermore, the report warns that “…the model is appropriate only for a narrow cohort of nonprofits that meet two related criteria: they must be able to effectively deliver and measure their social impact; and they must be able to translate that impact into financial benefits or cost savings that are traceable to the budgets of one or more institutions or government departments.”
Due to the potential and possible limits of PFS, the model may be currently more favorable to some state strategies than others. An evaluation of the costs and benefits of the program is therefore an important first step for states to identify if this model aligns with their capacity and policy priorities. With this in consideration, The CSG Healthy States National Task Force’s Fiscal Subcommittee recommends that states should assess Pay for Success models to fund health and human service programs[CS1] . Some states have already begun utilizing the model with promising results.
Utah’s High Quality Preschool Program seeks to provide a high-impact preschool education for low-income families. The program utilizes the Pay for Success structure for funding and partners with United Way of Salt Lake. Utah lacks a state funded preschool education and views this program as a way to mitigate future remedial or special education costs while reducing the taxpayer’s risk if the program is unsuccessful. Likewise, the Massachusetts Juvenile Justice Pay for Success Initiative brought together the state, Third Sector Capital Partners and Roca in what was one of the first PFS contracts in the country. Collectively, they sought to prevent recidivism in previously incarcerated youth. The PFS contract laid out clear benchmarks for Roca to reach regarding recidivism rates. Should these metrics be met, the state will disburse funding.