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Innovative Sources of Program Funding

During my career in criminal justice and substance abuse treatment, I continually return to the vexing issue of program funding.  Spectrum as most treatment organizations is a nonprofit organization that is dependent on State and local contracts, Medicaid reimbursement and philanthropic donations.  All these sources are variable and not entirely dependable.  While searching for alternative sources of funding I have come across a new and innovative financial vehicle - the “social impact bond” that is sometimes known as “pay for success”.  This approach provides opportunities for the public to invest in social programs that have promise of achieving measurable positive social outcomes. 

The first social impact bonds were offered in England to support a prison rehabilitation program where the proposed positive outcome was recidivism reduction.   In Britain where over half the prisoners return to prison within a year, a program was implemented with private investment that included treatment, housing and other support that predicted a 7.5% recidivism reduction.  Return on investment is in relation to the magnitude of recidivism reduction with no return if there is no change in recidivism.  Although results will not be available for two years, initial findings are encouraging.

Recently, Goldman Sachs invested approximately $10 million in a “social impact bond” to help fund a program in New York City. The initiative – in which Goldman Sachs partners with the City of New York, Bloomberg Philanthropies and MDRC, a social services provider – will finance a program called Adolescent Behavioral Learning Experience (ABLE), aimed at reducing the recidivism rate for adolescent offenders at the Rikers Island correctional facility. See the full McKinsy Report.

Social impact bond investing is especially attractive to philanthropies that have an opportunity to obtain a return on their investments rather then simply make one time grants that deplete their resources.   The Rockefeller Foundation has taken a strong leadership position in this area.

The government finds this approach attractive since public funds are not required for developing and operating programs while savings related to positive outcomes can be used to pay back investors.   Social impact bonds are rapidly gaining attention of policy makers in the federal government, Connecticut, Massachusetts, New York, Ohio and California.

One of the major challenges to the acceptance and success of social impact bonds is to design credible evaluations that would assess program impact carefully enough to base payments to investors.  Since Spectrum routinely evaluates their program outcomes, utilization of this new type of financing might be a valid option. Overall, Spectrum and similar nonprofit programs need a mix of funding and social impact bonds are an important option worthy of consideration.

Readers are invited to send in reactions and questions to me at hkwexler@aol.com.  I also welcome suggestions for future blog topics.

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