On its face, it sounds preposterous: Asking outside entities like large philanthropic organizations or Wall Street to invest hard cash in human services programs in the hopes of making money.
Still, public officials in Massachusetts are giving it a try. Called "social investment bonds," investors plop down money to fund a promising, yet unproven, preventative service. If the service succeeds, investors reap profits from future savings. If it doesn't? Well, that's the risk investors take in a free market.
The idea started in the United Kingdom, where the government has sold $8 million in bonds to 17 investors to fund an eight-year effort to keep small-time criminals from cycling back into prison. (Estimates are that every recidivist costs the government more than $200,000 annually.) If the program works -- that is if it keeps recidivism levels down to a certain percentage -- then the U.K. saves money and, ultimately, shares that money with investors. It could wind up being a considerable amount of money too. If the program cuts recidivism by 7.5 percent, investors recoup their money. If the program cuts recidivism by more, then the payout could be as high as 13 percent a year, or almost $13 million in profit to investors over the life of the bond.
While it's too early to tell exactly how well the U.K. experiment is working, U.S. officials are excited by its promise. As a result, the state of Massachusetts is giving the idea a try. The state's Executive Office for Administration and Finance recently floated a request for proposals from nonprofit service providers for preventative services they believe will save the state real money down the road. The office plans to cull out the most promising of those ideas as the foundation for a bond offering.
Dozens of nonprofits have responded to the RFP, including organizations like Roca, a nonprofit in Chelsea, Mass., that works to keep high-risk young adults out of trouble. Roca figures that spending $11 million now on the 650 youth it serves will save the state up to $38 million in down-the-road costs.
As of now, the details on how savings will be calculated and what percentage of those savings, if any exist, will be returned to investors has yet to be worked out. But it's not hard to predict at least a few of the ancillary benefits that could come with social investment bonds:
For one, social investment bonds essentially short-circuit short-term political timelines when it comes to spending on human and health services. Asking your average legislator to pony up a dollar today for an early childhood nutrition program in order to save three dollars over the next six years often doesn't compute. For elected officials, it's way too often an "I-need-to-see-savings-before-the-next-election" sort of world, especially in current economic times. That attitude withstanding, one might also hope that the mere existence of social investment bonds might focus elected officials on the long-range benefits of preventative spending on human and health services.
Second, jurisdictions that want to try the social investment bond experiment are going to really have to tighten up and hone their performance measurement and management practices. That doesn't mean simply pumping out decent quarterly reports on performance and progress. Social investment bonds could inspire the sort of years-long longitudinal thinking and studies that the human services field so desperately needs to see.
Third, it helps foundations that are interested in investing more tune into the value of measurable impact when it comes to how they spend their dollars -- especially those foundations with fairly focused missions, like improving public health or student educational achievement.
And last, the biggest potential payoff could be that the whole concept rubs off on the rest of government. That is, that it teaches public officials at all levels and in all program and policy areas the value of investing now -- whether for human services or infrastructure -- in order to forestall considerably greater costs down the road.
Perhaps that's asking too much in an atmosphere of governance and finance that operates in one-year, or at best, two-year budget cycles. But it’s not inconceivable that the biggest payoff of social investment bonds is to teach government the value of an ounce of prevention being worth millions of dollars in cure.
Of course, there are areas of policy where it will never be easy to tightly and confidently measure the effect of what either governments or foundations spend money on. But there are plenty of program and policy areas where it is clearly possible, and human services is one of them. Right now, it's all speculative, but the idea is intriguing enough that Governing will be covering social investment bonds in much greater depth in its December issue.