Governor Deval Patrick has a new plan to combat homelessness in Massachusetts, built around a whole new approach to longstanding and difficult social problems. It's called "pay for success."
Instead of using taxpayer money to help homeless people find housing, "pay for success" relies on banks and foundations to cover the initial costs. Then, if the programs actually work, the investors get paid back — plus a reasonable return.
What’s in the governor’s plan?
There are about 21,000 homeless people in Massachusetts, roughly 2,000-3,000 of whom are considered "chronically homeless," meaning they've been homeless for long stretches of time.
Helping the chronically homeless has proved a very difficult policy challenge, so the governor has assembled a new coalition of private and public sector players to try out a new approach.
Traditionally, if the state wanted to address an issue like chronic homelessness, it would consult with experts, develop a strategy, and then appropriate the funds necessary to implement that strategy. With "pay for success" contracts — sometimes called "social impact bonds" — the process is totally different:
1) The state picks a goal. In this case, that goal is to get chronically homeless individuals into housing and help them stay there.
2) An independent group, the Massachusetts Housing and Shelter Alliance, does the daily work of trying to meet that goal. That means matching homeless people with available housing and then ensuring they get services they need, such as medical care.
3) The Massachusets Housing and Shelter Alliance doesn't get funding from the state. Instead, it will receive $3.5 million from private investors, including the United Way, the Corporation for Supportive Housing, and Santander Bank.
4) Those investors will earn a profit if the program proves successful. Every time a chronically homeless person finds durable housing (meaning that it lasts for a year or longer), the investors get a reward payment, up to a total of $6 million. Should the program fail, few reward payments will be made and the investors will have to eat their losses.
Is this the first time this approach has been tried?
No, there are a small number of prior examples, including a program in Massachusetts to help ensure that young people who break the law don't become adults who break the law. That initiative is still in its first year, so it's too early to really assess, but it has received support from major backers including Goldman Sachs.
What are the risks?
Given that this approach has only been tried a handful of times, its real-world effectiveness is still very much uncertain. There are at least a few possible pitfalls.
For one thing, a lot depends on the initial goal. Make it too easy, and you're basically just transferring taxpayer money to investors. Too hard, and you won't be able to attract investors in the first place.
In addition, there's always a risk that investors will try to game the system. One example of this comes from the world of education reform. Pay teachers for the performance of their students and it turns out some of them will find creative ways to enhance student performance, including doctoring test sheets and asking weak students to leave school before test day. With "pay for success" initiatives, investors have a similarly strong incentive to make sure goals are met.
Is this the beginning of a broader trend?
Depending on your perspective, Governor Patrick has either been a leader in this area, or an outlier. New York and Utah are the only states with similar programs, though a number of others are considering the idea. Whether "pay for success" becomes the hot, new thing in state policy will depend in large part on the success of these early programs.
The governor's new initiative to combat chronic homelessness could someday be remembered as the inspiration for a whole new approach to governance. Then again, if it fails, it could be remembered quite differently.