Pay for Success: Uncommon Partnerships for the Common Good
As the child of a city manager, I grew up with dinner table conversations that often included such scintillating subjects as “municipal bonds as a method to invest private capital in our shared physical infrastructure.” So it is with geeky interest in public financing that I've been following “Pay For Success,” a new method of investing private capital for social good.
You may not expect to hear “Goldman Sachs” and “preschool” in the same sentence, but this innovative financial product is providing new opportunities for foundations and private investors to infuse capital into effective community solutions that have positive returns for investors, taxpayers and, most importantly, society.
Pay For Success programs are often complex financial deals, but they are a simple concept: Measurably improve the lives of people most in need by driving government resources toward more effective strategies. The first Pay For Success investments launched in the United Kingdom five years ago, and the results so far are promising. There are currently seven deals in the United States and several more in development.
One inspiring example, which I recently learned about at the White House’s Pay For Success convening in Salt Lake City, is underway in Utah. The state's Granite School District had studies indicating that when at-risk, low-income, children attended high-quality preschools, they were better prepared to enter kindergarten grade-ready and less likely to need special education and remedial services through 12th grade—saving millions of dollars and setting the students up for success. To expand the program, however, the district needed more than was available in the budget. Enter the Pay for Success dealmakers:
A $7 million investment by Goldman Sachs and the Pritzker Foundation will provide preschool to 4,100 students, beginning in 2013.
The students are being tracked through 6th grade to determine if they stay out of special education.
For each student that does not need special education services, the cost saving of $2,700 per year is paid back to investors.
The investors will be paid back their principal and 5% interest.
The State of Utah retains 5% of the avoided cost per student and then retains the other savings associated with the student not needing special services.
During a presentation hosted by Philanthropy Northwest and Mission Investors Exchange, Enterprise Community Partners gave an overview of the other Pay for Success deals underway, related to affordable housing, juvenile justice, energy efficiency, child welfare and recidivism reduction. These investments aren't created to make private investments necessary for required interventions, but rather to encourage governments to make long-term policy decisions that are best for society as well as taxpayers. The hope is that when Pay For Success provides objective evidence that programs are good investments, then local and state governments will include them in their budgets.
How can philanthropy be part of this exciting new opportunity?
Support a place-based community of learning or funder interest group to assess appetite and feasibility.
Invest in an advocacy strategy to develop the evidence and support needed for an investment with policymakers.
Fund grants to support feasibility studies, deal development, and program evaluation.
Mission invest in a project, either as a program-related investment (PRI) or to provide principal protection for other investors.
At Philanthropy Northwest, The Giving Practice and Mission Investors Exchange, we look forward to working with stakeholders to explore how Pay for Success can benefit more communities, through the resources of our network and experts. There are many reasons to support this new financial product, but above all, I am excited about the opportunity it provides private sector capital to help scale up effective government programs and interventions. Regardless of which side of the aisle you lean toward, more effective government programs—with greater positive impact and cost savings—is something on which we can all agree. How refreshing!
Nicole Trimble is a senior advisor with The Giving Practice, a team of consultants who blend customized solutions and deep knowledge of the field to help families, foundations and corporations navigate the changing landscape of today's philanthropy.