Social Impact Bonds: Spurring Innovation in Mass./NYC

“Social impact bonds offer an innovative way for public, private, philanthropic and nonprofit actors to come together and align their skills and resources in pursuit of measurable, positive social change.”

-- Kristina Costa, Center for American Progress, 2014

Last week, Dax-Devlon Ross profiled Roca—a Chelsea and Springfield, Mass. based non-profit designed to steer “high risk” youth away from poverty and violence and toward gainful employment and a middle-class life. Roca has done something all too rare in the social service world—commit to a data-driven approach to securing its goals, whereby success must be proved, rather than assumed.

Roca’s latest project is designed to reduce recidivism among young men. As part of the project, Roca plans to track every interaction between its employees and the participants in an online data system. At the first sign of trouble, employees initiate an intervention to get at the underlying cause of concern and forge a plan to keep the participant on track.

Roca’s program was recently awarded $27 million in seed money from Governor Deval Patrick’s Juvenile Justice “Pay for Success” Initiative. As stated in the award release:

[I]n Massachusetts, 64 percent of young male ex-offenders reoffend within five years, and only 35 percent of these young men gain employment within a year of release. Roca’s groundbreaking approach to positive youth development aims to interrupt the cycle of recidivism by filling a gap in services for high-risk populations. Through this project, Roca will aim to reduce the number of days that young men in the program are incarcerated by 40 percent. If this goal is met, the project would generate millions of dollars in savings to the Commonwealth that fully offset the cost of delivering services. 

The Social Impact Bond (SIB) model (shown in the nifty graphic from the Rockefeller Foundation) holds great promise, not simply as a financing mechanism in an era of budget shortfalls, but as a spur to creative experimentation within cities and states to solve some of our most pressing problems. SIBs allow government to invest in programs today that improve the lives of thousands and save money over the long term.

On some level, this is not a particularly novel concept. Indeed, business owners have long understood that investing in new equipment or hiring additional employees imposes short-term costs in pursuit of long-term profit. American families understand that buying life insurance and depositing money in their children’s college savings plans will pay dividends down the line.

Government should be no different. And yet, we have encountered many situations in recent years where we fail to make short-term investments that yield long-term gains. For instance, in New York City, we continue to shelter families without homes for as much as $36,000 per family per year, while rental assistance with support services for families can cost less than $10,000/family annually.

While SIB programs have heretofore largely been confined to programs concerning recidivism and formerly incarcerated individuals, many have openly wondered whether they can be put to use in other fields, most notably early childhood education and public health initiatives that allow for concrete measurements over a discrete period of time.

In 2012, my boss, then-Manhattan Borough President Scott Stringer, proposed using a SIB to expand availability of Early Head Start (EHS), an early intervention and prevention program for pregnant mothers and families with children ages 0 – 3. Despite the fact that children who attend Early Head Start are more successful educationally and emotionally, the program is so poorly funded that it enrolls less than 1 percent of eligible infants. Only 7000 slots are funded for children in all of New York State. Once full-day pre-K is up and running, the Administration should turn its attention to the critical formative years before pre-K, with SIBs as a possible financing mechanism for EHS or other programs.

SIBs aren’t the only mechanism that should be used to secure long-term savings. Municipal labor should also play a key role in this effort through “gain sharing.” 20 years ago, Mayor David Dinkins launched a “Productivity Advisory Council” that advocated for a gain-sharing model that would streamline city services and share savings with city workers.

One of the great successes was a Parks Department effort to improve efficiencies in the mechanics of tree pruning throughout the five boroughs. In short, New York had been force to cut workers to balance the budget during the early 90s recession. In the winter of 1993, the city’s tree workers were given the power to craft their own strategy, with an implicit promise of hiring back some of those laid off should city workers prove the victors.

As noted in a Harvard Business School case study, “Prior to the study, climbers and pruners had no input into how the crews were configured or what work they would be assigned on a given day; these decisions were the prerogative of the supervisors, only some of whom had any prior forestry experience.”

In two months, the workers’ improvements made them far more efficient than contractors and saved the city an estimated $100,000.

Whether through a public-private SIB model or a gain-sharing model that leverages the expertise and ingenuity of public employees, cities and states owe it to taxpayers to do all they can to reduce preventable costs by proactively investing in innovative programs.

Goldilocks: Flexibility in Carbon Policy and the Fallacy of the "War on Coal"

“If the language in the regulation is too loose, there could be little environmental impact. And if it is too stringent, it could lead to the shutdown of coal plants before there is enough alternative power to replace them.”

-- Coral Davenport, New York Times (4 Feb. 2014)

In coming months, the Obama Administration is set to reveal its climate rule for existing power plants (rules for new plants were published last year) under Section 111(d) of the Clean Air Act. These plants account for about 40 percent of the country’s emissions.

Drafting this rule has proven particularly difficult, not only because the challenge posed by climate change is so daunting, but also because a poorly drafted federal regulation could have dramatically different effects across the nation.

However, while the regulation must not be too loose or too stringent, there is a Goldilocks scenario rooted in Section 111(d), which provides flexibility for states to develop plans that comport with their economic needs and current energy production. Indeed, by taking a mass emissions approach to carbon emission reduction rather than a more targeted “rate-based” approach, the Federal Government will unlock the “states as laboratories” theory that has proven so successful in other aspects of American life.  

Importantly, flexibility of method need not (and should not) mean weakening of the underlying goal. As the Commonwealth of Kentucky wrote in a letter to Environmental Protection Agency Administrator Gina McCarthy in October, “Since President Obama’s goal is to reduce carbon dioxide emissions, and not simply favor one fossil fuel over another, compliance options that take into account demand and supply-side energy efficiency and renewable and other low-carbon generation sources must be allowed.”

Kentucky is a particularly interesting test case. Today, 92 percent of Kentucky’s power is generated from coal. For decades, this has meant low energy costs in Kentucky, leading its economy to become heavily dependent on manufacturing. As a result, as shown in the table, Kentucky’s “energy density” (the amount of energy it uses per Real GDP) is the highest in the nation.

An inflexible carbon emissions standard could potentially shutter Kentucky’s coal plants overnight, not only devastating the Bluegrass State’s economy and imposing considerable pain on working class families, but also leading to an abrupt turn toward natural gas electrical generation, rather than a slower, but more ambitious development of truly clean, renewable energy.

The much-discussed “War on Coal” (an political allegation created by climate change deniers in an effort to thwart any carbon legislation or regulation) does not, standing alone, accomplish the goals we have set forth as a nation vis-à-vis carbon emissions and climate change policy. Rather, the goal of carbon policy must not be to “pick winners and losers”—a task that the government is woefully incapable of performing—but to set ambitious standards and hold states accountable with carrots and sticks.

That’s why we should be encouraged by recent statements by EPA Administrator McCarthy, who told the National Association of State Energy Officials that the EPA would not be “imposing solutions” but would instead “open[] up opportunities” for states to experiment with different ways to reduce emissions.

In the end, even the Goldilocks scenario is unlikely to satisfy many Congressional Republicans, especially those from coal country who face primary challenges from the right (I’m looking at you, Senator Mitch McConnell). For them, the proverbial porridge will go uneaten.

But the rest of us understand that the decisions we make today and the courage to experiment with different approaches will preserve the planet for Goldilocks and the Three Bears for generations to come.