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How to Pay for Success
Pay for success programs (PFS) are attractive to governments because they get private investors to finance preventative public programs. The government only has to pay back investors if the desired results are achieved. But, notes a new report, “the theory of PFS looks better on paper than in reality.” The report, released Dec. 4 by a nonprofit called In the Public Interest (ITPI), outlines several concerns governments should address before entering into a PFS contract. It also lists questions officials should ask at every major stage of development from designing a program to measuring outcomes.
The report warned that the need to measure outcomes limits how PFS projects can be useful. For example, a now-closed PFS program at Rikers Island Prison in New York City funded a therapy program designed to reduce recidivism. While other actions like enacting policies to decrease the number of questionable misdemeanor arrests or make it easier for people to access bail have potentially larger impacts on recidivism, they are too hard to measure so are not good candidates for PFS programs, the report said.
Another problem is the measuring process itself. “Establishing cause and effect for a PFS can be subject to dispute,” the report noted. Recently, a Salt Lake County, Utah, PFS program drew criticism when it produced overwhelmingly successful results using preschool to reduce the number of children placed in special education by kindergarten. Some said that the program overestimated the number of kids who were at risk in the first place. The report quotes Ellen S. Peisner-Feinsberg, a senior scientist at the Frank Porter Graham Child Development Institute saying, “You have to be sure you have very rigorous ways to measuring the impact to make sure that it’s legitimate in terms of the outcome you get. That didn’t happen here.”
Two pension funds this week announced they were diversifying -- albeit in quite different ways. The Oregon Investment Council this week announced it is taking steps to reduce the reliance of the state’s biggest pension fund on the stock market. It will invest $900 million in so-called alternative investments including timber and infrastructure, which are industries that are somewhat detached from the nation’s economic swings. More than half of the money is going into a private equity fund called KKR Americas Fund XII L.P. The Oregon Public Employees Retirement Fund has invested in funds managed by Kohlberg Kravis Roberts & Co. since 1981 and over that time they have generated average annual profits of 18 percent for Oregon.
Meanwhile in Texas, the $3 billion Dallas Employees’ Retirement Fund announced it wants more ethnic and gender diversity among its fund managers because such diversity typically drives up returns on investments. According to Asset International, nearly 90 percent of senior money managers in the U.S. are white and most of them are men, however. Meanwhile, small or new investment firms tend to include more minorities and women. The Dalles fund said this week it will now allocate 10 percent of its portfolio to new investment managers with strong performance records. It is already on its way to achieving that goal and the fund is now launching its Next Generation Manager program to generate interest more among women and minorities who may not have considered such careers and who otherwise wouldn't get access to major investment opportunities.
Dallas isn’t the only pension fund seeking a tryout period with smaller fund managers in an effort to increase diversity -- CalPERS also has an emerging managers program where it seeks out well-performing managers from small firms to handle a small -- $20 million, for example -- initial investment. If the manager performs well, the pension fund is likely to extend the relationship.
The Bond Buyer announced its annul honorees for trailblazing women in public finance this month. Carol Kostik, New York City deputy comptroller, was one of the two main honorees. She juggles frequent debt sales, oversees the city’s more than $100 billion in outstanding debt, manages pension and other disclosures, and other responsibilities. Interestingly, Kostik noted that there are fewer women in public finance these days then when she started out more than 20 years ago. “While public finance was often viewed as the Wall Street sector with more opportunities for minorities and women, she wonders if women who may have been steered into public finance are finding career opportunities in other areas of investment banking,” the Bond Buyer said.
The second honoree was Meghan Burke, a public finance lawyer at the Boston-area firm Mintz, Levin, Cohn, Ferris, Glovsky and Popeo. Burke worked with the city on developing its 2024 Olympic bid until it bowed out earlier this year. She has also helped the Massachusetts Bay Transportation Authority (MBTA) since 1995 through various financial challenges and has had a similar longtime relationship with the Vermont Municipal Bond Bank, which helps smaller government entities sell debt.