Pay-for-Success Gains Momentum in the U.S.

Published Thursday, September 26, 2013 | by William Pinakiewicz

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Part 1 of a 2-part blog from William Pinakiewicz, Vice President, Eastern Region at Nonprofit Finance Fund. 

Also, please see NFF's press release announcing the first of a series of efforts to build service provider readiness for outcomes-based funding. 

Even in the best of times, nonprofit organizations that provide vital services to individuals, families and communities of need struggle to raise the revenue and capital necessary to meet the demand for their services and operate in a financially sustainable fashion. The period since the Great Recession of 2008 has been, and continues to be, far from the best of times. Surveys of the  sector, such as the one my organization,  Nonprofit Finance Fund, has conducted annually over the past five years, point consistently to the continued and increasing stresses faced by these vulnerable populations and the organizations that serve them.

Demand for services from these nonprofits has increased steadily over this period due to the heavy toll that structural changes in the domestic and global economy, persistently high levels of unemployment and budget pressures at all levels of government have taken on already vulnerable lower income individuals and families as well as increasingly vulnerable middle income individuals and families. While the demand for services is increasing, the historical sources of funding for them from government and philanthropy are either decreasing or struggling to keep pace with demand. In particular, cuts in social program budgets at all levels of government have been pervasive during this period and continue as the effects of sequestration ripple through the economy.

In a situation such as this, it is imperative that we focus on finding more cost-effective ways to provide these services, and that we optimize the results for each dollar invested. By results, we mean meaningful and measurable positive outcomes for the individuals, families and communities of need these programs are designed to serve. 

There has been a drive in the U.S. to develop Pay-for-Success financing mechanisms for the past three years. Pay-for-Success is increasingly gaining recognition as a potentially effective, replicable and scalable approach for attracting capital to finance social programs that deliver verifiable evidence of promised positive outcomes for the populations they serve, and do so at reduced costs through an emphasis on prevention and early intervention. As promising as Pay-for-Success appears at this juncture in its development, it is not the perfect or only solution for addressing the challenges we face in the financing the social sector. However, at a time when we are so hard pressed to find capital to efficiently and sufficiently finance effective social programs, it is important to acknowledge what it is we have learned from Pay-for-Success to date and to discuss what it will take to make outcomes-driven, Pay-for-success approaches successful and more broadly applicable to better serve the needs of (i) our most vulnerable populations, (ii) the nonprofit organizations that serve them, (iii) the governments that provide the vast majority of the funding for them, and (iv) the largely untapped sources of private capital interested in investing in the economic benefits associated with positive social outcomes for vulnerable populations and communities. 

Roughly a year ago, this outcomes-driven Pay-for-Success phenomenon in the US social sector reached an important inflection point in its early evolution. Almost two years of education, debate and investigation of Pay for Success were turning to action. The principal focus of this action was to adapt the Social Impact Bond, a financing mechanism first launched in the UK, to fit the contractual, regulatory, legislative, budgetary, political and cultural requirements of the U.S.  

Although initially slow to take root, the activity that resulted from this focus on financial engineering has been both impressive and well documented. A Pay-for-Success pilot transaction focusing on reducing adolescent recidivism at Rikers Island was launched by New York City.  Massachusetts solicited and awarded Pay-for-Success pilot transactions focusing on adolescent recidivism and permanent supportive housing. The US Department of Justice solicited and awarded Pay-for-Success planning grants and pilot transaction support funding for state and local government recidivism reduction programs. Fresno, California and The California Endowment announced a proof-of-concept pilot transaction for childhood asthma reduction. The US Department of Labor, New York State, Minnesota, Illinois and other state and local governments either launched Pay-for-Success solicitations or otherwise started seriously down the path to action through Requests for Information (RFIs) or other means. 

All of this activity has been built on the fundamental principles of Pay-for-Success - attracting private sources of capital to finance preventative and early intervention programs, a requirement to deliver verifiable positive outcomes, and net cost-savings compared to existing approaches). Importantly, this period of financial engineering also produced a diversity of Pay-for-Success approaches and structures. Even at this early proof-of-concept phase in its development, this diversity demonstrates the capacity of the Pay-for-Success concept to adapt to the requirements of diverse: (i) social mission areas and programs, (ii) levels of government in the U.S, (iii) private and philanthropic investment interests and (iv) local and regional requirements across U.S. geographies.