Social Impact Bond Series – Part 2: HEALTHY PIPELINE GROWTH IN 2014

As discussed in Part 1, I will be using the term PFS (Pay For Success) financing instead of ‘Social Impact Bond’ going forward.  PFS is a more accurate descriptor of the contractual relationships and financing mechanism, and it avoids being confused with other forms of municipal bonds.

To celebrate the end of the year, I offer here a quick recap of PFS activity that has taken place over the last twelve months.  2014 was a year of very healthy growth in the PFS deal pipeline.  Massachusetts and Chicago both announced that their PFS deals were finalized and going forward, bringing the number of active PFS programs in the United States up to five:

  • New York City – reducing recidivism/juvenile justice
  • New York State – reducing recidivism, workforce development
  • Massachusetts – juvenile justice/ addressing needs of at-risk youth
  • Salt Lake City, UT – early childhood education/intervention
  • Chicago, IL – early childhood education/intervention.

In addition to these programs, there are another 21 potential PFS deals that are currently being evaluated for potential economic and social impacts.  A large number of these potential deals would be run at the county or city level.  The newer service areas being evaluated include preventative health initiatives like asthma prevention; services to reduce addiction, improve mental health, and/or provide stable housing for chronically homeless people; and several child welfare and early education interventions:

  • Asthma prevention:  Alameda County CA, Baltimore MD, Fresno County CA
  • Homelessness/Mental Health: Denver CO, Minnesota, Santa Clara County CA, Cuyahoga County OH
  • Recidivism:  Oklahoma, Illinois
  • Child Welfare/Early Education: Connecticut, South Carolina, New York State
  • Teen Pregnancy:  Washington DC
  • Adult Ed:  Massachusetts
  • Various Needs Assessment/Feasibilty Studies:  LA County, Veterans Administration, Orange County, Salt Lake County, San Francisco County, Memphis.

In addition to the PFS programs listed above, additional program areas under development include reducing childhood obesity, reducing risk factors in pre-diabetic/diabetic adults, and violence prevention/’restorative justice’ programs.

To date, about $75 million in investment dollars have been committed to PFS projects in the United States.  This amount does not include grant money and federal program money that has been used to fund PFS feasibility studies and other outreach programs.  Funding sources for investment dollars include a range of banks, foundations, and individual donors, including:

  • $6.4 million from the Pritzker Foundation for early childhood education
  • $13.5 million from Bank of America/Merrill Lynch for reducing recidivism
  • $21 million from Goldman Sachs across all areas
  • $7.2 million in principal guarantees from Bloomberg Philanthropies.

Additionally, industry experts predict that the Federal government will likely direct another $300-500 million towards PFS projects in 2015, including $5 million already earmarked through the Department of Justice, up to $200 million through Workforce Innovation grants, and up to $300 million through the Office of Social Innovation programs.

For those looking for more information about PFS feasibility studies and deal flow, three great sources on the web are the Nonprofit Finance Fund, Third Sector Capital, and Social Finance US.

Finally, for those of you interested in more detail on the five currently active PFS programs in the US, a brief description of each follows:

  • New York City (2012) – A $9.6 million PFS contract to fund training and intervention programs to reduce recidivism among young ex-offenders (16-18 year olds) leaving the Rikers Island prison.  The program will run for four years.  Goldman Sachs is the investor, the intermediary is MDRC, and the target is to reduce recidivism by at least 10%.  Returns are on a sliding, capped scale depending on results.  Bloomberg Philanthropies contributed a $7.2 million grant to pay intermediary costs and reduce investor risk.
  • Massachusetts (2014) – A $27 million PFS contract to fund intervention programs targeted at at-risk young men in the probation system or leaving the juvenile justice system.  The program will run for seven years.  Third Sector Capital Partners is the intermediary, and there are six investors, with Goldman Sachs being the largest, plus an $11.7 million grant from the US Dept. of Labor.  The target is to reduce the number of incarceration days for young men in the program by 40%.  Returns vary by investor and are on a sliding scale depending on outcomes.  Massachusetts has authorized another $23 million for PFS contracts to address chronic homelessness and/or adult education, but these are still in the planning stages.
  • New York State (2013) – A $13.5 million PFS contract to fund training and employment programs for recently incarcerated individuals, with the twin goals of reducing recidivism and increasing employment in the target group.  The program will run for 5.5 years.  Social Finance US is the intermediary.  Bank of America Merrill Lynch is the main investor, with some additional foundation money and a $12 million grant from the US Dept. of Labor.  The target is to reduce the number of incarceration days for individuals in the program by at least 37 days, and to boost employment for individuals by at least 5% versus the control group.  Returns are on a sliding scale depending on outcomes.
  • Utah (2013) – A $7 million PFS contract to fund preschool programs for disadvantaged children in Salt Lake City, with the goal of closing the achievement gap and reducing the use of special education and remedial services in elementary and secondary school.  The United Way of Salt Lake is the intermediary, and the investors are Goldman Sachs (up to $4.6 million) and J.B. Pritzker ($2.4 million).  The pilot will roll out in phases, with an initial $1 million investment to enroll 600 new pre-K students, with downstream success targets calculated in reduced numbers of students receiving special ed services over the next 6+ years.   Maximum returns are around 5% if the program works.
  • Chicago (2014) – A $16.9 million PFS contract to provide early childhood educational services (pre-K) to up to 2,620 children over four years through the half-day Child-Parent Center (CPC) model. Goldman Sachs’ Social Impact Fund and Northern Trust are serving as the senior lenders with the J.B. and M.K. Pritzker Family foundation in a subordinate position. The intervention goals include increasing kindergarten readiness, improving third-grade literacy, and reducing the need for special education downstream in primary and secondary school.

Questions and/or comments on any of the above are welcome!



Diane Lynch

Diane Lynch has been an SVPRI partner since June 2009. Diane was a management consultant with Booz, Allen, working with domestic and international manufacturers and retailers in the food industry. From 2009-2011, she served as Director of Social Enterprises at Amos House, working with their catering, restaurant, baking mix, and home improvement businesses. She holds a BA from Brandeis University and an MBA from Boston University. Her public service experience includes work in education, municipal planning and urban environmental planning. Diane, her husband Jim and their three children reside in East Greenwich, Rhode Island.