Social Impact Bonds Can Help Achieve Progressive Goals in an Era of Austerity

Aug 10, 2011Brad Bosserman

handshake-150In a week-long series, prominent thinkers will look at ways to harness the private sector or extract more from a recalcitrant public sector in order to combat poverty and inequality. In the third post, Brad Bosserman explains how the credibility and effectiveness of these programs can help create a more equal society when the government isn't spending.

Despite sky-high unemployment and yawning economic inequality, budget hawks have succeeded in convincing policymakers that they should embrace short- and medium-term austerity in order to close the budget deficit. The debt ceiling compromise will include trillions of dollars in cuts to discretionary budgets, little or no new revenue, and automatically triggered cuts that would indiscriminately remove large slices of operating budgets across the board. These policies will endanger many of the social safety net programs that millions of Americans rely on. It is incumbent upon progressive policy leaders to not only consistently make the case for robust funding, but also advance ideas that can generate the most value for citizens in an increasingly resource-constrained environment.

Social Impact Bonds hold the potential to be one of those ideas. These regimes function by having state, local, or federal governments contract with a private intermediary (Social Bond Issuing Organizations, or SIBIOs) that agrees to design and execute a desired program against predetermined benchmarks. These arrangements have a number of unique benefits for progressives operating in an era of budget austerity. First, by off-loading the financial risk of failed interventions onto private intermediaries, the government can ensure that each dollar spent is effectively achieving a measurably positive outcome. Additionally, this minimization of wasted funding can have important perception benefits, allowing governments to make a strong public case for increased funding by guaranteeing results. If designed properly, this can be a win-win strategy for achieving expanded budgets and a more efficient deployment of scarce resources.

Social Impact Bonds are also appealing due to their broad, though not universal, applicability. The Center for American Progress highlights a few of the possible intervention points:

Imagine the social benefits and reduced taxpayer burden if we could:

  • Increase kindergarten readiness among low-income children
  • Increase college completion rates
  • Reduce criminal offenses and incarceration rates among minority youth
  • Raise the future earnings of laid-off workers
  • Reduce hospital readmissions among patients with chronic illness

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Once one begins thinking along these lines, it's easy to imagine the many areas where SIB regimes could be deployed effectively. Worker retraining programs are perfect candidates because of the vastly different results from various types of interventions. Some programs have been found to be highly effective, while others are functionally useless. But the current models of funding, unfortunately, focus primarily on inputs instead of outputs. SIBs can reorient that focus and incentivize results for real people. The appeal of this model, however, is not only in off-loading risk. We would expect that results-seeking SIBIOs and bond holders would also be incentivized to boost innovation, implement robust comparative effectiveness research, craft new evaluation systems, and scale up the most successful models. Harnessing these benefits of market-based approaches could be a real boon to progressive priorities.

While the Social Impact Bond model represents a possible way for progressives to respond to budget constriction, this regime is nascent and it's important to recognize some of the limitations and potential pitfalls.

First and foremost, any time that the government attempts to deploy the profit motive it can be said to be playing with fire. Regulatory capture will remain a real risk that must be continually guarded against, especially in the contract and negotiation phase. Well written contracts must ensure that the population being serviced is correctly and broadly defined and wind-down procedures are established that don't leave people twisting in the wind if SIBIOs pull the plug on projects that are tracking bellow expectations. Overcoming these two hurdles can mitigate the risks of SIBIOs skimming the candidates with the most potential for success or abandoning people who have come to depend on an under-performing project.

Finally, like all performance pay programs, SIB interventions must be able to provide measurable results as determined by credible impact assessments. Robust public-private partnerships should be established to create best practices for measuring, quantifying, and testing program efficacy with an eye toward avoiding "teaching to the test" and mitigating possible manipulation. This is certainly not an easy task, but it is long overdue and would provide significant cross-applicability for other, non-SIB programs as well.

The next generation of progressive leaders realizes that a strong and flexible safety net is essential, but some of the shortcomings of traditional funding and delivery mechanisms must be updated to reflect current realities. These young leaders chose to include Social Impact Bonds in their Budget for a Millennial America because they consistently value innovation and results over inertia-driven policies that are often perceived as anachronistic.

As we face a powerful, if misguided, consensus that governmental discretionary spending should be reduced, progressives must be at the forefront of advancing hyper-efficiency and crafting innovative proposals that can effectively market social interventions to policymakers and the public. Social Impact Bonds are far from a panacea, and there are many programs that are ill suited to this type of regime, but this is the sort of innovation that advances the conversation and re-envisions the mechanics of achieving progressive goals.

Brad Bosserman was a lead author of the Budget for a Millennial America and a Research Fellow with the Campus Network. He is currently pursuing a master's degree in government at Johns Hopkins University.

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