Balancing Public and Private Interests in Pay for Success Programs: Should We Care About the Private Benefit Doctrine?”

Published Monday, September 24, 2018 | by Sean Delany and Jeremy Steckel

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In the rapidly expanding world of social impact finance, “pay for success” or “PFS” programs are increasingly popular vehicles for attracting private resources to address historically intractable social problems. Also known as “social impact bonds,” these programs are designed to encourage private investors to advance capital to fund social services and receive a return from the government only if predetermined “success metrics” for the target populations are met. As well as private investors and government agencies, participants include social service providers, technical advisors, and other entities that have been recognized as tax-exempt under section 501(c)(3) of the Internal Revenue Code.

This Article is an effort to understand how the private benefit doctrine might affect the structures of PFS programs in the United States, and might limit or encourage their expansion in the future. The doctrine prohibits charitable entities from being operated more than incidentally for the benefit of private interests. The boundaries that tax-exempt organizations must observe when engaging with profit-making entities—whether through transactional relationships or joint ventures—to achieve their charitable missions are far from clear, because the private benefit doctrine has evolved in piecemeal fashion without a coherent conceptual framework. As PFS programs evolve and relationships between participating exempt organizations and profit-making investors are designed, how will the exempt organizations ensure they are not violating the private benefit doctrine?

Despite the inconsistent jurisprudence surrounding the private benefit doctrine, applying it to PFS programs demonstrates that it protects against valid concerns not addressed elsewhere in the Code, and offers a cost-benefit framework which we use to draw conclusions about the desirability of funding social services through PFS programs.