SOCIAL IMPACT BONDS: Creative Lawyering Required!
by Peter Smith
By Marjorie Singer
In recent years, government and private philanthropists have sought to focus their investments on services and interventions that show promise for addressing society’s most intractable and pressing problems. And they are doing so in a manner that emphasizes and measures social impact, thereby ascertaining whether the services result in a quantifiable benefit to the individual and to society. One of the implications of this trend toward quantifiable “results based” interventions is that lawyers are tasked with devising and documenting the rights and obligations that will govern the relationships among government, philanthropy and various other participants who are engaged in this innovative means for effecting change.
When government and philanthropy collaborate to address a human service need, the potential is great for learning whether the service or intervention is effective and for institutionalizing what is demonstrated to be successful. A recent example is the Social Innovation Fund, a White House initiative operated through the Corporation for National and Community Service, which awards funds to philanthropy. In turn, the philanthropic entity selects nonprofit organizations to operate innovative programs assisting, as examples, troubled youth and low-wage workers, and also engages independent evaluators to measure the impact of the programs. The information to be gleaned from this cooperative effort will be used to determine whether the public funds will continue to support the innovative service.
An Introduction to the Social Impact Bond
The social impact bond (“SIB”) offers another innovative way for private philanthropy and government to collaborate and test promising interventions. Inaptly referred to as a bond (sometimes called a “pay-for-success” arrangement), the SIB leverages private investment for a human service purpose intended to create social impact that might reduce government spending down the line. The investor’s funds are directed to a service that has shown promise: that is, the data show positive outcomes for recipients but typically the service has not been subject to a rigorous evaluation through the use of a random assignment design. Government will provide funding support for the innovation if, after a rigorous evaluation, the service demonstrates success, by saving revenue that must be expended in the absence of the intervention. The statistical evidence that the intervention saves governmental expenditures triggers the obligation for government to repay, with some return, the private investor.
The SIB is responsive to the ambitions of all parties to the transaction. Private philanthropists seek to focus their investments on promising interventions that can make a quantifiable social impact. If successful, these investments yield both the intended outcomes and a return on the initial investment. Providers of health, social and educational services want to know that their services are delivered in an efficacious manner and that they make a difference in the lives of participants. Government officials demand that public funds are spent to measurably improve lives, thereby reducing the need for additional spending on behalf of those same individuals. The interest in funding universal pre-K, for example, is based on the belief that early intervention, in particular for poor children, will save costs in remedial education and other services that may be required as the children age.
In the Washington State legislature, the House Early Learning & Human Services Committee considered House Bill 2337, which was an attempt to create a “social investment steering committee” to research and potentially fund a pilot SIB with the state government. The bill was passed out of the Early Learning & Human Services Committee, but did not make it to a full floor vote during this year’s short session in Olympia. Nevertheless, this legislative activity demonstrates an interest among state leaders about the possibilities of innovative pay-for-success public-private financing.
The Rikers Island SIB
The nation’s first SIB is now taking place at Rikers Island, New York. Rikers Island is New York City’s jail, where hundreds of adolescent men, ages 16-18, are detained each year, unable to post bond and awaiting disposition of their pending charges. Most of these men are poor, underprivileged and black or Latino. Once exposed to the detention experience, they are likely to recidivate; Department of Correction data show that nearly one half of the adolescents incarcerated at Rikers will return within one year of being discharged.
The Rikers Island SIB intervention provides these young detainees with a form of cognitive behavioral therapy (“CBT”) that has shown promising results in correctional settings. If this intervention takes hold, thereby changing the young men’s assessment of risk and consequences, it is anticipated that recidivism will decrease, with proportionate savings to New York City. Success in the intervention’s impact will be determined through measuring recidivism of these participants against recidivism of young men having similar characteristics who previously were detained at Rikers. This is a comparative evaluation design; it was not feasible to conduct a random assignment design at Rikers.
The Rikers SIB resulted from months of negotiation among New York City’s Department of Correction; Office of the Mayor; Bloomberg Family Foundation; service providers Osborne Association and Friends of Island Academy; evaluator Vera Institute of Justice; and investor Goldman Sachs Bank. MDRC, a New York City based nonprofit that designs and evaluates demonstration projects, served as the intermediary, namely the orchestrator for the creation, implementation and operation of the Rikers SIB.
Like all complex transactions, a SIB reflects the interplay among various parties, each with singular interests. The intermediary is the relationship manager and transaction developer. For the Rikers SIB, MDRC chose the CBT curriculum; determined with the Mayor’s Office and the Department of Correction the cost/benefit calculation, the pay-for –success formula and the conditions for the Rikers operation; chose the providers and developed the terms and conditions for the program’s implementation and operation; participated in the creation of the evaluation plan; secured a grant agreement and a guarantee undertaking from Bloomberg Family Philanthropies; and developed a loan agreement with Goldman Sachs Bank.
The Lawyer’s Crucial Role in SIB Creation
Lawyers were involved in all stages of the Rikers Island SIB’s development, representing each party but with attention to the sine qua non of the financial transaction. The conditions of the funder/lender, requirements pertaining to contracting with the City of New York, and the operational challenges facing implementation of a service at Rikers all had to be addressed and the results documented in the several SIB contracts.
Certain issues were particularly nettlesome: the minimum conditions for planning, implementing and evaluating CBT; interests of the respective parties in controlling risk and ensuring indemnification; concerns about the risks to participants subject to the intervention; prospect that political will might change over the period of time needed for implementation and evaluation; concerns about how to tell the SIB story and the ownership of information regarding the SIB’s various components.
Lawyers who are involved with the creation of a SIB must be versed in the complexity of the overall transaction as well as the respective interests of the various parties. Before the many features of the transaction are documented, service providers, cost benefit analysts, governmental budget officials, independent evaluators and of course private investors must agree on the metrics for success and their measurement. All issues pertaining to program design, due diligence monitoring, participant involvement and measurements for success must be vetted and resolved. And the parties must all subscribe to the terms and conditions pertaining to financing the intervention.
As a new instrument, the SIB presents the risk of the unknown. Accordingly, to get the various parties comfortable with a complex transaction like a SIB—and notwithstanding the intermediary’s responsibility for uniting the segments of the SIB—each party should be independently represented by counsel. This ensures that the negotiations identify and resolve all issues that ought to be considered, thereby increasing the likelihood that this and future SIBs will achieve their goal of instituting cost-effective improvements in human services. Thus, while SIBs have great potential to be a tool for impactful programs and meaningful social change, their creation and success as a viable tool will require creative lawyering.
*Marjorie Singer was MDRC’s General Counsel during the creation of the nation’s first SIB. She is affiliated with the Apex Law Group, LLP in Seattle.
This article is provided for general education purposes only; it does not constitute legal advice in any way. For more questions regarding the above article please contact Marjorie Singer at email@example.com or Peter J. Smith at firstname.lastname@example.org.
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