Bonds that bring social dividends

Massachusetts can claim a number of firsts in the effort to improve the lives of its citizens: the first public school, the first library, the first transit system. Now the state is pioneering another idea that is surely a sign of the times: “social innovation financing.”

The idea is to fund government programs — for the homeless, say, or troubled youth — not with direct budget appropriations but through third parties that assume the risk if the program doesn’t produce results. The state enters into a contract with an intermediary that matches up philanthropic investors, who provide the money, and social service agencies, who provide the expertise. If the program achieves certain agreed-upon results — and only if it does — the state reimburses the investors, with a small return.


It sounds like a scheme hatched on Wall Street, not Beacon Street. And indeed the new financing vehicle — sometimes called a “social impact bond” — adopts several principles and practices from the business community, such as pay-for-performance and measurable outcomes. “There’s a newfound interest in performance management . . . in changing the culture of state government to focus on results,” said Jay Gonzalez, state secretary of administration and finance.

That’s all well and good, so long as the result being sought is to help people, not just save money. Happily, the first two agreements the Patrick administration announced earlier this month involve some of the most humane and effective social welfare organizations in the state.

Social impact bonds have been used to raise money for prison programs in England, but Massachusetts will be the first state in the nation to complete such “pay for success” contracts. One agreement sets goals for reducing recidivism among young offenders who are returning to the streets after serving time in the juvenile justice system. The other promises to reduce health care costs for chronically homeless individuals by stabilizing their lives with permanent housing first.


There is plenty of room for improvement on the status quo. According to Gonzalez, a homeless adult spends on average of 180 days a year in a shelter, eight days in jail, five days in detox, and makes 3½ visits to the emergency room, for an estimated cost of $35,000 per individual per year. Obviously, preventing such a chaotic, unhealthy lifestyle in even a small percentage of this population will save money — money that can be used to repay investors.

Social innovation financing is intended to reduce risk, but these initial deals, at least, are a pretty safe bet. One of the intermediaries is the Massachusetts Housing and Shelter Alliance, and its Home & Healthy For Good program has been demonstrating the wisdom of this approach since 2006. Under that program, which has so far found permanent housing for 582 homeless adults, Medicaid, shelter, and incarceration costs on average decreased from $33,505 to $8,614. Even after factoring in the cost of the program, the annual savings was $9,423 per case — a pretty nice return. Gonzalez says the new contracts will not replace current state funding but allow programs to expand.

Some worry that a profit incentive will lead investors to fund only the programs with the best chance of return, abandoning the hardest social welfare cases. But precisely because the hardest cases are the most expensive, they also have the greatest potential for savings.


Another advantage of this kind of financing is that it takes the uncertainty out of budgeting, at least for a few years. Many good programs don’t get funding long enough to prove their value. Gonzalez says the two contracts probably won’t produce savings for a few years, so the Legislature set aside $50 million in the current state budget for the repayments to investors whenever the programs prove their mettle.

Human service advocates have long been wary of treating government like a business. Some privatization experiments have had terrible outcomes — just look at the “kids for cash” scandal in Pennsylvania, where a juvenile judge accepted kickbacks for sending thousands of minor offenders to for-profit prisons. But the taxpayers are not in a generous mood, to put it mildly. If this new model reassures them that their public investments are producing measurable results and even saving money, social spending could become not just generous, but smart.

Renée Loth’s column appears regularly in the Globe.