The Bond Buyer explains the efforts by New York City and Massachusetts to tap the capital markets to fund social intervention programs under a new mechanism called social impact bonds. Target areas include chronic homelessness and youth crime. Backers say if well-executed, the idea would benefit investors, social service providers, and governments alike, especially in the financially squeezed Northeast. The program enables the public sector to leverage upfront funding from investors. They are also called “pay for success” contracts, with governments paying only if programs meet goals, in which case all parties benefit financially.
The idea is in its infancy, with only a two-year-old prison program in Peterborough, U.K., as a model. “Assessing a nascent market — or one that isn't clearly defined — is a tricky undertaking,” McKinsey & Co. said. Anthony Figliola of Uniondale, N.Y., lobbying group Empire Government Strategies said, “It's a novel approach to funding social projects run by nonprofits. These nonprofits do a lot of good things to minimize recidivism and homelessness and keep kids in prevention programs, but they're the first to get reduced or go altogether during budget cuts.” While “bonds” is a misnomer — they're not bonds in a muni sense — they could open doors for new funding mechanisms. “This does not behave like a traditional municipal bond because of the risk transfer. The government only pays if the program is a success. The issuing entity is not the government, so this does not affect the credit rating of the state,” said Tracy Palandjian of Social Finance US, whose sister organization in Britain is an intermediary with the Peterborough program.