Engage the Private Sector to Develop Innovative Solutions for Social and Economic Problems Facing Low-Income Communities

Challenges

People will not want to settle in cities that do not prioritize basic services. From safe drinking water to good public schools, cities must be able to provide basic necessities if they want to see significant economic development growth. In fact, spending on basic public services is the second most impactive factor in major urban economic development.

Unfortunately, when natural disasters occur, it is these same basic services that often take a hard hit, particularly if they were under-funded before the event. Extreme weather events can result in the disruption of public services that fuel the economy, including power and telecommunication outages, long-term school, business, and road closings. Future-proofing these integral parts of a community, as well as getting them up and running again quickly in the wake of a disaster, must be a top priority for cities.

The Opportunity

The private and philanthropic sectors, along with the federal, state and local government, can play a critical role in ensuring our cities are providing residents with basic public services. In recent years, there has been increased public and private interest in Social Impact Bonds (SIBs), an innovative financial tool that harnesses private capital to support critical but underfunded public services. SIBs are a promising way to create new public-private partnerships to tackle some of the most pressing social and economic problems facing low-income communities, all while ensuring that any taxpayer investment yields measurable results.

Under a typical SIB contract, private investors provide upfront capital to fund a particular program (e.g., services for families at risk of becoming homeless). Those investors are paid back by the government with a financial return, only if predefined social outcomes are achieved (e.g. a reduction in families entering homeless shelters). Often the financial return to investors comes from the money saved through a reduction in government spending. If the program falls short, the investors would not recoup their upfront investment and incur losses.

The contract is overseen by at least one intermediary, which is responsible for negotiating the terms of the deal, identifying service providers, raising capital from private investors and disbursing payments. In addition, all parties agree to have an independent evaluator track the program’s outcomes through a rigorous analysis.

A total of 11 SIB initiatives have been launched to date in the U.S., including projects aimed at reducing prison recidivism, improving workforce readiness and providing early childhood education. There are currently dozens more contracts under development across the country covering a wide range of social issues, from preventing and curing asthma to reducing teenage pregnancy rates.

Action Steps

Legislative

To date, all closed SIB contracts have been devised and negotiated at the state or local level, with little financial support from the federal government. However, many of these initiatives have the potential to yield meaningful long-term federal savings. Congress should prioritize legislation to help mitigate some issues SIBs face a result of a lack of federal involvement, and to clarify the federal government’s role in future SIB initiatives.

A number of bills have been introduced with this goal in mind. Reps. Pat Tiberi (R-Ohio) and John Delaney (D-Md.) have introduced the Social Impact Partnerships to Pay for Results Act, and a similar bipartisan bill was introduced in the Senate by Sens. Todd Young (R-Ind.) and Michael Bennet (D-Colo.). These bills would establish a new interagency council to identify, support and monitor state and local SIB initiatives that have the potential to yield long-term savings to the federal government. The legislation would also create a 10-year, $300 million fund to support eligible SIBs in three ways:

• Paying for successful outcomes: The federal government would be authorized to enter into contracts with state and local governments and pay for certain successful outcomes. This would give the federal government a seat at the negotiating table, allowing state and local practitioners to quantify and capture federal savings as part of a SIB’s financial model.
• Supporting feasibility studies: Before a SIB can get off the ground, the first step is to test whether the basic financial model is feasible. The legislation would make available up to $10 million to support these studies.
• Supporting rigorous evaluations: A key part of any SIB is a rigorous, third-party evaluator to track the program’s efficacy and impact. The bills would provide financing to support these evaluations, as under SIB’s current financial model they are often difficult to fully fund.

Executive

The Administration should include policy priorities to enhance the Federal Government’s role in SIBs, like the legislative language mentioned above, in its annual Budget Request to Congress.