A public preschool program in Salt Lake City Utah has generated a first round of dividends back to private investors based on reaching outcome goals stated as part of the initial investment. The concept, generally called “Social Investment Bonds,” represents an alternative strategy to secure non-governmental financing for public projects (or complementary projects) with repayment attached to achievement of certain goals or outcomes.
From coverage of the Salt Lake City school effort on the Huffington Post website:
The Salt Lake City program funded preschool for 595 low-income children. Without preschool, an estimated 110 of those kids would have needed special education when they entered first grade. Only one did. That standout success saved the state of Utah and local charities $281,550, according to Goldman Sachs. Under the terms of the investment, 95 percent of the savings are repaid to the lenders.
The social impact bond allows governments to experiment with new services without direct public funding — and to structure the programs so that they only continue, and provide a return to investors, if they work.
The New York Times’ Dealbook section profiled the project:
The payment represented the first time a so-called social impact bond paid off for investors in the United States.
The idea of social impact bonds is still very new. The first one was started in England in 2010; Goldman started the first in the United States in 2012.
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The bonds are already being talked about as one of the most promising ideas to come out of finance recently — providing a new way to fund social programs in an era of government budget cuts.
But the effectiveness of the bonds has been unclear. Only one of the British efforts has returned results so far. (It was a success.) Goldman’s first social impact bond to publish outcomes — a program that attempted to reduce recidivism among inmates on Rikers Island in New York — failed this summer.
For people studying social impact investing, the results in Utah are exciting — even more so given the children’s success. Among the 110 students who had been expected to need special education had they not attended preschool, only one actually required it this year.
“We’re in the beta testing stage of this whole endeavor, and now we have one example where the concept worked as intended in terms of delivering the outcomes and executing the contract,” said John Roman, a senior fellow at the Urban Institute who is researching social impact bonds.
In Maryland, Social Impact Bonds have risen to some level of discussion, but have not been implemented. 2013 legislation was introduced to have the State Department of Education solicit bidders for such a project, and the Department of Legislative Services was asked to prepare a report examining a similar approach to financing correctional re-entry programs.