Social Impact Bonds

My life’s trajectory turned on a dime on February 4th, 2013.  As a result, I have decided to follow my lifelong dream of running for Cincinnati City Council.  My platform revolves around tax incentives for big business, better not for profit management, education reform and a resolution to our city’s pension issue.  One of the methods that I feel could help resolve two of the aforementioned four topics is the implementation of a social impact bonds (SIB) initiative in our city.  I would like to see SIBs, similar to New York City, address recidivism rates in Cincinnati.  For close to five years I worked with returning citizens with felony convictions at my nonprofit, Choices Café.  I learned of injustice and the difficulty it was for my friends to find gainful employment.  With strategic and innovative nonprofits in Cincinnati like Lighthouse Youth Services and Hillcrest, combined with the global headquarters of Procter & Gamble, it seems to be a natural next step for city government to propose SIBs to the community.  Furthermore, the University of Cincinnati has compiled much research that already proves what methods help to reduce recidivism.  We have all of the players needed to make a significant difference, now all we need is a leader to make it happen.

SIBs were first implemented in Peterborough in the United Kingdom.  The initial model was developed by Social Finance and was geared toward reducing the recidivism rate in the city.  To date, the model has proven successful and the first SIB piloted in the United States is currently being implemented in New York City.  This model is also aimed at reducing the recidivism rate in the city.

A SIB is not a “bond” in the traditional sense that it is held to maturity with a guaranteed return.  Rather, it is “pay-for-success” social impact loan.  In the SIB model, an investor will make an illiquid investment into a program and only actualize a return if the program is successful.  In this way, the investor stands to lose money in the worst case scenario – break even in a better case scenario – or make a minimal profit in the best case scenario.  Nirav Shah, director at Social Finance, describes SIBs in this way:  “a Social Impact Bond is an innovative public, private, nonprofit partnership that raises capital to funnel into prevention programs and bring them to scale” (Hudson, 2).  The unique facet of SIBs is that they do bring so many, seemingly disparate, groups to the table over initiatives that have proven success.

To date, the SIB model is comprised of four primary stakeholders:

1)  The government (local, state and/or federal)

2)  The investors

3)  The social service providers

4)  The intermediary

To me, the role of “intermediary” is the key element in this arrangement.  It is no secret that the three other stakeholders are not commonly seen in the public sector as “allies.”  In the SIB model, they are not only allies, but partners with a mutual dependence and vested interest upon one another’s success.  The intermediary’s role, according to Shah, is to “identify issues that we think work well with SIB financing – identify solutions, bring the stakeholders to the table and then [sic] issue a Social Impact Bond” (Hudson, 3).

The model in NYC is groundbreaking and is formed by a partnership with the city government, Goldman Sachs Bank (not their foundation), the Bloomberg Family Foundation, MDRC, Rikers Island and the newly formed Adolescent Behavioral Learning Experience (ABLE) program.  ABLE was developed as the means through which the city and Goldman Sachs will reach their objective – namely that the recidivism rate in NYC will fall below the current 50% level at which it stands now.  If the recidivism rate falls by 10%, then Goldman Sachs will be repaid the $9.6 million dollars they invested.  If the rate falls by more than 10%, then Goldman Sachs will actualize a return on the loan upwards of $2.1 million.  A key facet of this arrangement is the guarantee clause.  For example, if the recidivism rate falls by 8.4%, then Goldman Sachs receives no payment – however, if the rate falls by a minimum of 8.5% then Goldman Sachs would receive half of their investment back, or $4.8 million.  This guarantee, which has been pre-invested by the Bloomberg Family Foundation in MDRC is quite similar to a loan guarantee a bank would issue to a small business (which is, in reality, far riskier than loans made to large corporations).

Andrea Phillips, vice president of the Urban Investment Group at Goldman Sachs, raises a very valid point regarding the risk involved with the SIB model – the “implementation and impact risk.”  That is, selecting the method to combat any given social ill, in this case, recidivism, must be painstakingly well-researched so that all of the parties involved actualize their return.  Most importantly, however, the research must be well-founded so that those impacted directly by the program – the service recipients – are receiving the best quality care for their individual needs.

A few “kinks” in this model are evident.  One is what will happen when Mayor Bloomberg steps down as mayor and someone else takes his place?  What will happen to this well thought out initiative?   There must be contractual clauses in the government contract to ensure that these kinds of situations are thought out.  In Massachusetts, where an SIB program is being initiated, the local government has set their money aside in a trust so that it cannot be touched.  In NYC, there is a clause that any new leadership, if he/she wanted to cancel the contract, would have to pay out the loan in full to Goldman Sachs.  Another potential hazard is that of the government turning over responsibility to a third party – this is why research and outcomes must be firmly sought before any decision is made.  If, after much deliberation, a program such as ABLE is proven to produce results, then I feel only good can come from the arrangement as the government has certainly never proven that it has the capacity to help those who need it the most in our society.

So, why consider this model?  For starters, the not for profit world of financing is drastically changing and many investors want to do just that, invest, in NFP capacity and scale.  Secondly, money in all of our major cities is fading, pensions are dried up and regional city councils have no time to focus on matters of great import (like recidivism rates).  SIBs free up councils to get to the work at hand while the city government actualizes a return on their outside investor’s cash by “transferring performance risk away from taxpayers and onto investors” (Hudson, 4).  In essence, taxpayers are only taxed when the programs succeed and the government needs to utilize those tax dollars to pay back their investors (as opposed to the widely accepted current model in which citizens are taxed regardless of outcomes).  Thirdly, the NFPs involved in these initiatives are guaranteed funding for five to ten years, not simply one year (a typical grant cycle), which gives them enough time to build to scale.  Fourthly, the investor actualizes a double bottom line – i.e., a social impact and a minor return.

So, how would this model look in Cincinnati?

First, a bit of background on our city, state and nation:

–        In our city’s concentrated areas of poverty – Avondale, Over-the-Rhine, the West End – the joblessness rate is 40%, and a breeding ground for increased recidivism.

–        The labor market for young black men is significantly deteriorating in Cincinnati as the average age of dropouts is rapidly reducing.

–        Nationally, 60 – 70% of black male high school dropouts since the mid-1960s now go to prison.

–        The United States accounts for 25% of the world’s incarcerated population.

–        Ohio has a recidivism rate of 31.2% (as of December, 2012).

–        Cincinnati’s childhood poverty level is the third worst in the nation.

–        There is a direct correlation and causation associated with children raised in poverty, incarceration and increased recidivism.

(Data compiled from City of Cincinnati Public Safety Committee and the State of Ohio’s Department of Rehabilitation and Correction)

As a city council candidate in a city with the 3rd worst childhood poverty rate, and as a man who has dedicated his life to serving those without a voice, I see SIBs as being able to impact our city in a very positive way.  In Cincinnati we already have all of the makings for a team that could assemble over the cause of childhood poverty & recidivism and make a profound impact.

The players that I see collaborating to make this dream a reality are:

–        The City of Cincinnati government

–        The Greater Cincinnati Foundation (GCF)

  • GCF’s role would be to help with the guarantee and also with monitoring of programs.

–        The Health Foundation of Greater Cincinnati

  • The Health Foundation would serve as an excellent intermediary for this entire proposal, as they already provide numerous pro bono services to providers in the Greater Cincinnati Area, and one of their main foci is that of developing healthy living and behavioral excellence in our area’s youth.

–        The University of Cincinnati

  • UC has done extensive research into what makes a recidivism program successful.  Having a leading research university on our team would not only aid in selecting a program, but would also have the potential for serving as intermediary.  UC has already identified the following five as being facets of truly successful recidivism reduction programs:
    • Leadership and implementation
    • Staff
    • Offender assessment
    • Treatment components and core correctional practices
    • Quality assurance (www.uc.edu)

–        Harvard Kennedy School

  • The Rockefeller Foundation gave the Kennedy School a large donation so that they could provide pro bono technical assistance to State and Local governments for project monitoring and program implementation.

–        Kroger, Procter & Gamble, General Electric, PNC Bank or 5/3 Bank

  • One of these five entities would serve as the primary investor.  If need be, I envision a model where one or two of the aforementioned participate in the SIB pilot in Cincinnati.  We are certainly fortunate to have so many companies headquartered in our city, and the untapped potential of SIB partnership is certainly promising.

–        Hillcrest or Lighthouse Youth Services

  • I envision the two collaborating to develop a brand new, state –of-the art program similar to (or even based on) ABLE.

A question that many will ask, and have already asked of Mayor Bloomberg, is “why is the government deferring responsibility to outside providers?”  The answer, as stated above, is quite simple – there is no money in local government to serve those who need it the most.

In Cincinnati our projected budget deficit in 2014 and 2015 is $25.8 million and $20.9 million, respectively.  Our council is in the process of potentially leasing our parking to an outside company and incur a $92 million influx of cash to help “right the ship” (an initiative I support).  That said, none of the monies are slotted to working with our indigent population.  If the $92 million can be used to offset the deficit, fatten the pension pot and build new developments to spur further economic growth, then I feel the SIB model will be able to do the same on the social services side.  As is evident from the list above, we have all of the major players we need right here in Cincinnati, but someone needs to make it happen.  Hopefully, come November 5th, 2013, I can be that person.

 

Works Cited

“Mayor Bloomberg, Deputy Mayor Gibbs and Corrections Commissioner Schirro announce nation’s first  Social Impact Bond Program,” Press Release, The City of New York – Office of the Mayor

“SIBling Revelry:  Are Social Impact Bonds the Next Big Thing?”  Hudson Institute’s Bradley Center for Philanthropy and Civic Renewal

“The Communicator,” 2012 Report – State of Ohio’s Department of Rehabilitation and Correction

“Memo,” from Dr. Victor Garcia to Councilman Chris Smitherman – submitted to the City of Cincinnati Public Safety Committee

www.goldmansachs.com
www.uc.edu

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